2014 D.C. Tax Expenditure Report

Government of the
District of Columbia

Vincent C. Gray
Mayor

Jeffrey S. DeWitt
Chief Financial Officer

District of Columbia
Tax Expenditure Report

Produced by the
Office of Revenue Analysis

Issued May 2014

District of Columbia Tax Expenditure Report
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Office of the Chief Financial Officer
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Table of Contents

ACKNOWLEDGEMENTS ............................................................................................ II

INTRODUCTION........................................................................................................... III

SUMMARY DATA ON DISTRICT OF COLUMBIA TAX EXPENDITURES ...... IX

PART I: FEDERAL CONFORMITY TAX EXPENDITURES ................................. 27
EXCLUSIONS ......................................................................................................................................28
ADJUSTMENTS ................................................................................................................................116
DEDUCTIONS ...................................................................................................................................130
SPECIAL RULES ..............................................................................................................................166

PART II: LOCAL TAX EXPENDITURES ............................................................... 173
INCOME TAX .....................................................................................................................................174
REAL PROPERTY TAX ..................................................................................................................238
DEED RECORDATION AND TRANSFER TAX ......................................................................284
SALES TAX ........................................................................................................................................300
INSURANCE PREMIUM TAX .......................................................................................................321
PERSONAL PROPERTY TAX ......................................................................................................324
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Acknowledgements

This report is a product of the District of Columbia Office of Revenue Analysis (ORA). Jason
Juffras, an ORA fiscal analyst, researched all of the tax expenditures, drafted the report, and
estimated the federal conformity tax expenditures. In addition, the following ORA staff members
estimated the forgone revenues from local tax expenditures: Steven Giachetti, the director of
revenue estimation; Betty Alleyne, fiscal analyst; Lindsay Clark, fiscal analyst; Kelly Dinkins,
data manager; Daniel Muhammad, fiscal analyst; and Sharain Ward, fiscal analyst.

Individuals from other units of the Office of the Chief Financial Officer also contributed their
knowledge and expertise to the report, particularly Deborah Freis, senior policy analyst in the
Office of Economic Development Finance; Radhika Batra, policy analyst in the Office of
Economic Development Finance; and Lester Morter, exemption specialist in the Real Property
Tax Administration. I also thank the individuals from other D.C. government agencies who
provided important information on many local tax expenditure provisions.

Jeffrey S. DeWitt
Chief Financial Officer

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Introduction

D.C. Law 13-161, the Tax Expenditure Budget Review Act of 2000,
1
requires the Chief
Financial Officer to prepare a biennial tax expenditure budget that estimates the revenue loss to
the District government resulting from tax expenditures during the current fiscal year and the next
two fiscal years. The law defines tax expenditures as the revenue losses attributable to
provisions of federal law and the laws of the District of Columbia that allow, in whole or in part,
a special exclusion, exemption, or deduction from taxes or which provide a special credit, a
preferential rate of tax, or a deferral of tax liability.
2

The Chief Financial Officer prepared the first required tax expenditure budget as part of the
proposed fiscal year 2003 budget. This report, which estimates the revenue forgone due to tax
expenditures in fiscal years 2014 through 2017,
3
covers more than 200 separate tax expenditure
provisions. This tax expenditure budget expands on the analysis done in prior versions by
summarizing research and findings of the D.C. Tax Revision Commission, an expert panel
established by the Mayor and Council to conduct a comprehensive review of the Districts tax
system.

Understanding Tax Expenditures

Tax expenditures are often described as spending by another name, or disguised spending.
Policymakers use tax abatements, credits, deductions, deferrals, and exclusions to promote a wide
range of policy goals in education, human services, public safety, economic development,
environmental protection, and other areas. Instead of pursuing these objectives through direct
spending, policymakers reduce the tax liability associated with certain actions (such as hiring new
employees) or conditions (such as being blind or elderly) so that individuals or businesses can
keep and spend the money, often for particular purposes. For example, a program to expand
access to higher education could offer tax deductions for college savings instead of increasing
student loans or grants. Regardless of which approach the government uses, there is a real
resource cost in terms of forgone revenue or direct expenditures.

Tax expenditures are frequently used as a policy tool in the District of Columbia. There are two
types of tax expenditures: (1) federal conformity tax expenditures, which apply U.S. Internal
Revenue Code provisions to the D.C. personal and corporate income taxes, and (2) local tax
expenditures authorized only by D.C. law. By conforming to the federal definition of adjusted

1
D.C. Law 13-161 took effect on October 4, 2000, and is codified in 47-318 and 47-318.01 of the D.C.
Official Code.

2
See D.C. Official Code 47-318(6).

3
Although the law requires that the tax expenditure budget estimate the revenue loss for the current fiscal
year and the next two fiscal years, this report covers the current year and the following three fiscal years to
be consistent with the Districts four-year financial plan and budget. The four-year time frame for the
Districts financial plan and budget is mandated by Public Law 104-8, the District of Columbia Financial
Responsibility and Management Assistance Act of 1995. See D.C. Official Code 47-392.01(b).
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gross income (with several exceptions), the District adopts most of the exclusions and deductions
from income that are part of the federal personal and corporate income tax systems. Most other
states with an income tax use federal adjusted gross income as the basis for their income tax.

An example of a federal conformity tax expenditure is the home mortgage interest deduction: the
District follows the federal practice of allowing taxpayers to deduct home mortgage interest
payments. In addition to the 112 federal conformity provisions covered in this report,
4
there are
122 tax expenditures established by local law. An example of a local tax expenditure is the
homestead deduction, which allows all D.C. taxpayers who live in their own home to deduct a
certain amount ($70,200 at the time of this writing) from the taxable value of the home. Both
federal conformity and local tax expenditures warrant regular scrutiny to make sure they are
effective, efficient, and equitable, and to highlight the tradeoffs between tax expenditures and
other programs.

Since the previous tax expenditure budget was published in 2012, policymakers have established
six new local tax expenditures. These involve (1) income tax credits for qualified social
electronic commerce companies, (2) real property tax exemptions for non-profit affordable
housing developers, (3) real property tax credits for qualified social electronic commerce
companies, (4) deed recordation tax exemptions for non-profit affordable housing developers, (5)
personal property tax exemptions for solar energy systems, and (6) personal property tax
exemptions for cogeneration systems. Within the past two years, policymakers also repealed two
local tax expenditures: a capital gains exclusion for qualified high-technology companies, and a
sales tax exemption for motor fuel (the latter resulted from a restructuring of the motor fuel tax).

Tax expenditures differ from direct expenditures in several respects. Direct spending programs in
the District receive an annual appropriation and the proposed funding levels are reviewed during
the annual budget cycle. By contrast, tax expenditures remain in place unless policymakers act to
modify or repeal them; in this respect, they are similar to entitlement programs. Direct spending
programs are itemized on the expenditure side of the budget, whereas revenues are shown in the
budget as aggregate receipts without an itemization of tax expenditures.

The tax expenditure budget aims to subject tax preferences to the same scrutiny as direct
appropriations. The itemization of tax expenditures provides policymakers with a more complete
picture of how the government uses its resources so they can consider how to allocate resources
more effectively. For example, if ineffective or outmoded tax expenditures were eliminated,
policymakers could free up resources to expand high-priority direct spending programs or cut tax
rates. This exercise is designed to provide policymakers with the information they need about tax
expenditures to make sound fiscal policy decisions.

Structure of the Report

This tax expenditure budget and accompanying report, prepared by the staff of the Office of
Revenue Analysis (ORA), offers extensive background information on each tax expenditure, in
addition to estimates of the revenue forgone for fiscal years 2014 through 2017. The report
provides (1) the statutory basis and year of enactment for each provision, (2) a description of the

4
A small number of federal conformity tax expenditures are not included in this report because they
concern tax benefits for industries, such as agriculture and mining, which are non-existent or almost non-
existent in the District of Columbia.
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tax expenditure and how it is structured, (3) the purpose of the tax expenditure, and (4) a
discussion of impacts.

The report begins with a summary table that provides an overview of the Districts tax
expenditures. The summary table classifies the tax expenditure according to the type of tax and
provides the statutory authority, year of enactment, policy area, and estimated revenue loss for
fiscal years 2014 through 2017.

The body of the report is organized into separate parts for federal conformity (Part I) and local tax
expenditures (Part II). The local tax expenditure section includes sub-sections for each of the
Districts major taxes: personal and business income taxes, real property tax, deed recordation
and transfer tax, sales tax, insurance premiums tax, and personal property tax. Each tax
expenditure is described in detail, including benefit levels (the amount of abatements, credits,
deductions, deferrals, exclusions, and exemptions) and eligibility criteria.

The different types of tax expenditures are as follows:

exclusions, which are items that are not considered part of a taxpayers gross income for
tax purposes, even though they increase his or her resources or wealth. Exclusions do not
have to be reported on a tax return but still cause adjusted gross income to be lower than
it otherwise would be. Employer contributions to health and retirement plans are
examples.

exemptions, which are per-person reductions in taxable income that taxpayers can claim
because of their status or circumstances (such as being a senior citizen).

adjustments, which are reductions in taxable income that are available to all tax filers
who meet certain criteria, whether or not they itemize their deductions. Adjustments are
also known as above-the-line deductions and are entered on the tax return.

deductions, which are reductions to taxable income that must be itemized on the tax form.
This option is not available to those who choose the standard deduction.

subtractions, which are reductions from federal adjusted gross income that are used to
derive District of Columbia adjusted gross income. Subtractions reflect income that is
taxed by the federal government but not by the D.C. government.

credits, which reduce tax liability directly instead of reducing the amount of income
subject to taxation. Credits can be refundable (if the amount of the credit exceeds tax
liability, the taxpayer gets the difference as a direct refund) or non-refundable (the
amount of the credit cannot exceed tax liability).

abatements, which are reductions in tax liability (typically real property tax liability) that
are often applied on a percentage basis or through a negotiated process.

deferrals, which delay the recognition of income to a future year or years. Because they
shift the timing of tax payments, deferrals function like interest-free loans to the taxpayer.

rebates, which are refunds provided to qualifying taxpayers as a separate payment (as
contrasted with tax credits that are first applied as a reduction of tax liability).
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special rules, which is a category used for federal tax expenditures that involve blended
tax rates or special accounting procedures and do not fit neatly into any other category.

Policy and Program Areas

Each tax expenditure was classified by one of 17 policy or program areas, such as education,
health, social policy, and transportation. The policy areas, shown in the summary tables, largely
mirror the categories used by the Joint Committee on Taxation (JCT) of the U.S. Congress in
order to facilitate comparisons. Nevertheless, the categories were modified and expanded in
several cases to make them more relevant to the District of Columbia. For example, the business
and commerce category used by the JCT was changed to economic development to reflect a
policy focus of particular importance in the District, and a public safety category was added
(there are no public safety tax expenditures at the federal level).

The four policy areas with the largest number of federal conformity provisions are economic
development (28 tax expenditures), income security (15), education (12), and health (10).
Nevertheless, the ordering of federal conformity tax expenditures by estimated revenue loss for
each policy area (FY 2014) produces a different ranking. Income security provisions account for
the largest estimated revenue loss due to the forgone revenue from employer-provided fringe
benefits such as pension contributions, which are excluded from the employees taxable income
(as are the earnings on those contributions). Health provisions rank second in revenue loss for
federal conformity provisions, followed by housing and economic development. Many federal
tax expenditures that are classified under economic development concern the definition or timing
of different types of business income, expenses, reserves, and depreciation.

The four policy areas with the largest number of local tax expenditures are housing (28 tax
expenditures), economic development (25), and social policy (14), and income security (12).
Once again, the ordering of local tax expenditures by estimated revenue loss for each policy area
produces a different ranking.
5
The general law category (which includes constitutional and
statutory mandates for tax policy) had the largest estimated revenue loss due to the forgone
revenues from federal tax-exempt property in the District of Columbia, followed by economic
development, social policy, and housing.

Important Caveats

A particular caution about the interpretation of the revenue loss estimates in this report deserves
emphasis. The forgone revenue estimates are intended to measure what is being spent through
the tax system, or alternatively, the amount of relief or subsidy provided through each provision.
Nevertheless, the forgone revenue is not identical to the amount of revenue that could be gained
by repealing the tax expenditure. There are three main reasons why:

First, the estimates of revenue loss are static and therefore do not reflect behavioral
changes that might occur if a tax expenditure were repealed. For example, if the District
eliminated the local supplement to the federal earned income tax credit, people might
reduce their hours of work and their income tax payments could also drop.

5
The estimated revenue loss in these calculations was for FY 2014.
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Second, the revenue loss for each tax expenditure is estimated independently, which does
not account for interaction effects among different tax provisions. For example, D.C. law
establishes that taxpayers may not claim both the local supplement to the earned income
tax credit and the D.C. low-income credit. If the local earned income credit were
abolished, more taxpayers might then claim the low-income credit.

Third, the D.C. government may not be able to collect the full amount owed due to
administrative reasons. For example, if the District disallowed for local income tax
purposes an exemption or exclusion that is allowed on the federal income tax (a process
known as decoupling), the District would probably not recoup all of the forgone
revenue. That is because taxpayers would have to make a separate calculation on their
District income taxes to add back the dollars that had been excluded, and compliance
with this requirement would not be universal (nor would audits detect all violations).

Because of the factors described above, the total forgone revenue from tax expenditures is not
equivalent to the sum of the individual estimates of forgone revenue. As the U.S. Government
Accountability Office has stated:

While sufficiently reliable as a gauge of general magnitude, the sum of the
individual revenue loss estimates has important limitations in that any
interactions between tax expenditures will not be reflected in the sum Thus,
the revenue loss from all or several tax expenditures together might be greater or
less than the sum of the estimated revenue losses from the individual tax
expenditures, and no measure of the size or the magnitude of these potential
interactions or behavioral responses to all or several tax expenditures is
available.
6

Methodology

Summary statistics from D.C. tax returns were an important source of data for the tax expenditure
budget and were particularly useful for estimating the forgone revenue from local income tax
provisions. Unfortunately, in many instances tax expenditures cannot be estimated from available
tax data because they involve income, property, or economic activity that is not taxed, and the
relevant information is never reported to the Office of Tax and Revenue (OTR). Therefore, ORA
often used data from federal agencies (such as the Census Bureau and the Bureau of Economic
Analysis) and D.C. government agencies to estimate the number of beneficiaries and the revenue
lost from certain tax expenditures.

OTR generally lacks information on federal conformity tax expenditures because the amounts
excluded are not reported and the amounts deducted are subtracted from federal adjusted gross
income, which is the starting point for a D.C. income tax return. Therefore, ORAs federal
conformity estimates represent a District of Columbia portion of the nationwide tax expenditure

6
U.S. Government Accountability Office, Government Performance and Accountability: Tax Expenditures
Represent a Substantial Federal Commitment and Need to Be Reexamined (GAO-05-960, September
2005), p. 3.

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estimates prepared by the JCT.
7
ORA estimated the D.C. portion using two fractions: (1) a ratio
representing the D.C. share of the relevant activity or population, such as D.C. taxable income
divided by national taxable income, and (2) a ratio representing the D.C. average tax rate divided
by the U.S. average tax rate.

Because of the methodological challenges and data issues, it is important to view the revenue
estimates as indicating orders of magnitude rather than providing precise point estimates.

In addition, U.S. Internal Revenue Service rules provide that, No statistical tabulation may be
released outside the agency with cells containing data from fewer than three returns, in order to
protect the confidentiality of individual tax records.
8
Tax expenditures with fewer than three
claimants are therefore listed in this report as no estimate, except in the case of real property tax
expenditures where different rules apply.
9

Key Terms for Summary Tables

too small: refers to a federal conformity tax expenditure with forgone revenue that was
less than $50 million annually, according to the JCT. The revenue loss to the District
from conforming to the federal policy would be very close to zero.

sunset: means that there will be no revenue loss because the provision has expired.

minimal: refers to a local tax expenditure for which precise data are lacking, but the
forgone revenue is estimated to be less than $50,000 per year.

no estimate: refers to a local tax expenditure for which precise data are lacking, but for
which the revenue loss might not be minimal. In addition, no estimate refers to cases
in which calculations cannot be made because of confidentiality rules.

Comments Welcomed

The Office of Revenue Analysis hopes that this report will contribute to a more informed
discussion of budget and tax policy in the District of Columbia by providing clear and concise
information both for policymakers and for the general public. ORA welcomes comments on the
report and will use the feedback to improve future versions.

7
In some cases, ORA used tax expenditure estimates from the U.S. Department of the Treasury when data
from the Joint Committee on Taxation were not available.

8
U.S. Internal Revenue Service, Publication 1075, Tax Information Security Guidelines for Federal, State,
and Local Agencies and Entities (January 2014), p. 116. Even if the taxpayers are not specifically
identified, it might be possible for someone to figure out the confidential information from an estimate of
revenue involving so few people or businesses.

9
D.C. Official Code 47-1001 states that, The Mayor shall publish, by class and by individual property, a
listing of all real property exempt from the real property tax in the District. Such listing shall include the
address, lot and square number, the name of the owner, the assessed value of the land and improvements of
such property, and the amount of the tax exemption in the previous fiscal year. IRS rules do not affect
real property taxation because the federal government does not impose a real property tax.
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Summary Data on District of Columbia Tax Expenditures

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I. Federal Conformity Tax Expenditures
(Individual and Corporate Income Taxes)

# Name of Tax Expenditure Program Area Year Enacted
Internal Revenue
Code Section FY 2014 FY 2015 FY 2016 FY 2017
Federal Exclusions
1 Capital gains on assets transferred at death Economic development 1921
1001, 1014, 1023,
1040, 1221, and
1222 $29,330 $31,270 $33,633 $36,178
2 Capital gains on assets transferred as a gift Economic development 1921 1015 ($1,989) ($5,116) $2,274 $3,126
3 Cash accounting, other than agriculture Economic development 1916 446 and 448 $1,665 $1,804 $1,804 $1,943
4 Credit union income Economic development 1937
501(c)(14) and
12 USC 1768 $405 $463 $521 $579
5
Distribution from redemption of stock to
pay taxes imposed at death Economic development 1950 303 too small too small too small too small
6 Gain on like-kind exchanges Economic development 1921 1031 $4,263 $4,405 $4,690 $4,974
7 Imputed interest Economic development 1964
163(e), 483, 1274,
and 1274A $420 $420 $420 $490
8
Interest on small-issue qualified private-
activity bonds Economic development 1968
103, 141, 144,
and 146 $366 $366 $366 $366
9 Magazine, paperback, and record returns Economic development 1978 458 too small too small too small too small
10 Small business stock gains Economic development 1993 1202 $694 $971 $971 $1,110
11 Discharge of certain student loan debt Education 1984
108(f), 20 USC
1087ee(a)(5) and
42 USC 2541-
1(g)(3) $244 $244 $244 $244
12
Earnings of Coverdell education savings
accounts Education 1998 530 $122 $122 $244 $365
13 Earnings of qualified tuition programs Education 1997 529 $1,096 $1,340 $1,462 $1,583
14 Employer-provided education assistance Education 1978 127 $1,073 $1,073 sunset sunset
15 Employer-provided tuition reduction Education 1984 117(d) $179 $179 $179 $268
16 Interest on education savings bonds Education 1988 135 too small too small too small too small
Revenue Forgone ($ in thousands)

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Internal Revenue
Federal Exclusions (cont.)
17
Interest on state and local private-activity
bonds issued to finance education facilities Education 1986
103, 141, 142(k),
145, 146, and
501(c)(3) $3,192 $3,294 $3,397 $3,500
18
student loan bonds Education 1965
103, 141, 144(b),
and 146 $469 $469 $469 $469
19 Scholarship and fellowship income Education 1954 117 $3,289 $3,411 $3,654 $3,776
20 Cafeteria plan benefits Employment 1974 125 $32,715 $34,950 $36,737 $38,704
21 Employee awards Employment 1986 74(c) and 274(j) $268 $268 $268 $268
22 Employee stock ownership plans Employment 1974
401(a)(28),
404(a)(9), 404(k),
415(c)(6), 1042,
4975(e)(7), 4978,
and 4979A $668 $668 $816 $816
23
Employer-paid meals and lodging (other
than military) Employment 1918 119 and 132(e)(2) $1,698 $1,877 $2,056 $2,235
24 Housing allowance for ministers Employment 1921 107 and 265 $626 $715 $715 $715
25 Miscellaneous fringe benefits Employment 1984 117(d) and 132 $6,704 $6,883 $7,061 $7,330
26
Spread of acquisition of stock under
incentive stock option plans and employee
stock purchase plans Employment 1981 422 and 423 ($719) ($668) ($668) ($668)
27
Voluntary employees' beneficiary
associations Employment 1928
419, 419A, 501(a),
501(c)(9), and
4976 $2,592 $2,771 $2,860 $2,860
28
bonds issued to support energy facilities Energy 1980
103, 141, 142(f),
and 146 $27 $27 $27 $37
29 Accrued interest on savings bonds General fiscal assistance 1951 454(c) $980 $980 $980 $1,050
30
Allocation of interest expenses attributable
to tax-exempt bond interest by financial
institutions General fiscal assistance 2009
141, 265(a),
265(b), and 291(e) $290 $347 $347 $405
31
Interest on public-purpose state and local
bonds General fiscal assistance 1913 103, 141, and 146 $33,543 $35,198 $36,136 $37,074
32
Employer contributions for medical care
and medical insurance premiums Health 1918 105, 106, and 125 $127,821 $136,579 $144,357 $153,027

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Internal Revenue
33
bonds issued to finance non-profit hospital
construction Health 1913
103, 141, 145(b),
145(c), 146, and
501(c)(3) $2,093 $2,299 $2,299 $2,459
34
Medical care and TriCare medical
insurance for military dependents, retirees,
retiree dependents, and veterans Health 1986 112 and 134 $2,400 $2,550 $2,600 $2,800
35
Medicare Part A -- hospital insurance
benefits Health 1970 N.A./administrative $15,752 $16,796 $16,995 $18,187
36
Medicare Part B -- supplementary medical
37
Medicare Part D -- prescription drug
38 Capital gain on sale of principal residence Housing 1997 121 $35,243 $36,948 $38,511 $39,790
39
Income from discharge of principal
residence acquisition indebtedness Housing 2007 108 $287 sunset sunset sunset
40
bonds issued to finance housing Housing 1980
103, 141, 142,
143, and 146 $1,990 $2,196 $2,196 $2,196
41
Compensatory damages for physical injury
or sickness Income security 1918
104(a)(2) -
104(a)(5) $1,430 $1,520 $1,520 $1,520
42 Disaster mitigation payments Income security 2005 139 too small too small too small too small
43
Employer contributions for premiums on
accident and disability insurance Income security 1954 105 and 106 $3,397 $3,575 $3,665 $3,844
44
Employer contributions for premiums on
group-term life insurance Income security 1920 79 $2,860 $3,039 $3,218 $3,486
45
Employer pension contributions and
earnings plans Income security 1921
401-407, 410-
418E, and 457 $86,257 $95,731 $108,513 $118,793
46
Income of trusts to finance supplemental
unemployment benefits Income security 1960 501(c)(17) $27 $36 $45 $54
47
Investment income on life insurance and
annuity contracts Income security 1913
72, 101, 7702,
and 7702A $41,353 $42,406 $43,400 $44,595
48 Public assistance cash benefits Income security 1933 N.A./administrative $5,212 $5,420 $5,629 $5,733

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Internal Revenue
49 Roth IRA earnings and distributions Income security 1997 408 $1,993 $2,272 $2,550 $2,874
50
Social Security and Railroad Retirement
benefits Income security 1938 86 $13,029 $13,559 $14,127 $14,809
51
Survivor annuities paid to families of
public safety officers Income security 1997 101(h) too small too small too small too small
52 Workers' compensation benefits Income security 1918 104(a)(1) $8,313 $8,581 $8,939 $9,296
53
Active income of controlled foreign
corporations International commerce 1909
11, 882, and 951-
964 $28,661 $31,208 $33,119 $36,361
54
Allowances for federal employees working
abroad International commerce 1943 912 $8,484 $8,908 $9,332 $9,757
55 Income earned abroad by U.S. citizens International commerce 1926 911 $5,563 $6,583 $7,696 $8,530
56
Inventory property sales source rule
exception International commerce 1921
861, 862, 863,
and 865 $1,969 $2,027 $2,142 $2,200
57
Benefits and allowances for armed forces
personnel National defense 1925 112 and 134 $3,030 $3,272 $3,454 $3,575
58 Combat pay National defense 1918 112 $545 $606 $727 $788
59 Military disability benefits National defense 1942
104(a)(4),
104(a)(5) and
104(b) $121 $121 $182 $182
60
Contributions in aid of construction for
water and sewer utilities Natural resources and environment 1996 118(c) and 118(d) too small too small too small too small
61
Earnings of certain environmental
settlement funds Natural resources and environment 2005 468B too small too small too small too small
62
Energy conservation subsidies provided by
public utilities Natural resources and environment 1992 136 too small too small too small too small
63
bonds issued to finance water, sewer, and
hazardous-waste facilities Natural resources and environment 1968
103, 141, 142,
and 146 $366 $366 $366 $366
64 Employer-provided adoption assistance Social policy 1996 137 $89 $89 $80 $77

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Internal Revenue
65 Employer-provided dependent care Social policy 1981 129 $1,511 $1,609 $1,698 $1,804
66 Foster care payments Social policy 1982 131 $536 $536 $536 $536
67
Employer-provided transportation
assistance Transportation 1984 and 1992 132(f) $4,737 $5,095 $5,542 $5,989
68
bonds issued to finance airport, dock and
mass commuting facilities Transportation 1968
103, 141, 142,
and 146 $732 $835 $835 $835
69
bonds issued to finance highway projects
and rail-truck transfer facilities Transportation 2005
103, 141, 142(m),
and 146 too small too small too small too small
70 G.I. Bill education benefits Veterans' benefits 1917 38 USC 5301 $665 $720 $780 $847
71 Veterans' benefits and services Veterans' benefits 1917 38 USC 5301 $3,235 $3,565 $3,930 $4,350
Federal Adjustments
72
Classroom expenses of elementary and
secondary school educators Education 2002 62 $210 sunset sunset sunset
73 Higher education expenses Education 2001 222 $278 sunset sunset sunset
74 Interest on student loans Education 1997 221 $1,705 $1,705 $1,827 $1,827
75 Contributions to health savings accounts Health 2003 223 $1,044 $1,143 $1,242 $1,391
76
Health insurance premiums and long-term
care insurance premiums paid by the self-
employed Health 1986 162(l) $3,818 $4,022 $4,227 $4,500
77
Contributions to self-employment
retirement plans Income security 1962
401-407, 410-
418E, and 457 $33,051 $34,979 $37,458 $39,937
78
Employee contributions to traditional
Individual Retirement Accounts Income security 1974 219 and 408 $6,166 $6,722 $7,371 $7,974
79
Overnight travel expenses of National
Guard and Reserve members National defense 2003
62(a)(2)(E) and
162 $50 $50 $50 $50

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Internal Revenue
Federal Deductions
80
Accelerated depreciation of buildings
other than rental housing Economic development 1954 167 and 168 $345 $345 $403 $403
81 Accelerated depreciation of equipment Economic development 1954 167 and 168 $7,893 $7,893 $7,893 $7,893
82
Small life insurance company taxable
income Economic development 1984 806 too small too small too small too small
83 Amortization of business start-up costs Economic development 1980 195 $139 $139 $139 $139
84 Completed contract rules Economic development 1986 460 $463 $521 $521 $521
85
Exception from passive loss rules for
$25,000 of rental real estate loss Economic development 1986 469(i) $20,125 $22,711 $24,299 $26,813
86
Expensing of depreciable small business
property Economic development 1958 179 $5,505 $5,367 $5,367 $5,644
87
Expensing of magazine circulation
expenditures Economic development 1950 173 too small too small too small too small
88 Film and television production costs Economic development 2004 181 too small too small too small too small
89 Gain on non-dealer installment sales Economic development 1986 453 and 453A(b) $6,809 $6,184 $5,709 $5,338
90 Life insurance company reserves Economic development 1984
803(a)(2),
805(a)(2), and 807 $1,505 $1,563 $1,563 $1,621
91
Loss from sale of small business
corporation stock Economic development 1958 1244 $83 $83 $83 $83
92
Property and casualty insurance company
reserves Economic development 1986 832(b) $232 $232 $290 $290
93 Research and development expenditures Economic development 1954 59(e) and 174 $3,531 $4,052 $4,400 $4,515
94
Amortization of certified pollution control
facilities Energy 2005 169(d)(5) $232 $174 $174 $174
95
Depreciation recovery periods for specific
energy property Energy 1986 168(e) $463 $521 $463 $463
96 Energy-efficient commercial property Energy 2005 179D $173 $173 $173 $173
97 Blue Cross and Blue Shield companies Health 1986 833 $232 $232 $232 $290
98 Medical and dental care expenses Health 1942 213 $10,069 $11,531 $13,155 $14,048
99 Accelerated depreciation of rental housing Housing 1954 167 and 168 $5,045 $4,918 $4,918 $5,021

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Page xvi
Internal Revenue
Federal Deductions (cont.)
100
Mortgage interest on owner-occupied
residences Housing 1913 163(h) $68,651 $71,811 $75,832 $83,684
101
State and local property taxes on owner-
occupied residences Housing 1913 164 $17,158 $18,238 $19,498 $20,638
102 Casualty and theft losses Income security 1913
165(c)(3), 165(e),
and 165(h) -
165(k) $142 $142 $142 $142
103 Deduction of foreign taxes instead of a credit International commerce 1913 901 $174 $174 $174 $174
104
Financing income of certain controlled
foreign corporations International commerce 1962 953 and 954 $869 sunset sunset sunset
105 Charitable contributions Social policy 1917 and 1935 170 and 642(c) $55,257 $57,684 $60,209 $63,107
106
Costs of removing architectural and
transportation barriers to the disabled and
elderly Social policy 1976 190 too small too small too small too small
Federal Special Rules
107
60-40 rule for gain or loss from section 1256
contracts Economic development 1981 1256 $142 $200 $200 $200
108
Interest rate and discounting period
assumptions for reserves of property and
casualty insurance companies Economic development 1986
831, 832(b), and
846 $463 $463 $463 $463
109 Inventory accounting Economic development 1938 475, 491-492 $3,753 $3,927 $4,042 $4,216
110
Special alternative tax on small property and
casualty insurance companies Economic development 1954
321(a),
501(c)(15), 832,
and 834 $58 $58 $58 $58
111
Apportionment of research and development
expenses for determining foreign tax credits International commerce 1977 861-863 and 904 $290 $290 $232 $174
112
Interest-charge domestic international sales
corporations International commerce 1986 991-997 $232 $232 $232 $232

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Page xvii
II. Local Tax Expenditures
(D.C. Individual and Corporate Income Taxes)

# Name of Tax Expenditure Program Area Year Enacted D.C. Code Section FY 2014 FY 2015 FY 2016 FY 2017
D.C. Income Tax Exemptions
113
Additional personal exemption for the
blind Income security 1987 47-1806.02(d) $90 $92 $95 $95
114
Additional personal exemption for the
elderly Income security 1987 47-1806.02(e) $4,652 $4,787 $4,922 $4,922
D.C. Income Tax Subtractions
115
Qualified high-technology companies:
depreciable business assets Economic development 2001 47.1803.3(a)(18) no estimate no estimate no estimate no estimate
116 College savings plan contributions Education 2001
47-4501 - 47-
4512 $1,066 $1,066 $1,066 $1,066
117 Public school teacher expenses Education 2007 47-1803.03(b-2) $112 $112 $112 $112
118
Health insurance premiums paid for a
domestic partner (business income tax) Health 1992
47-
1803.02(a)(2)(W) $170 $178 $188 $198
119
Health insurance premiums paid for a
domestic partner (personal income tax) Health 2006
47-
1803.03(a)(15) and
46-401(b) $24 $24 $25 $26
120 Health professional loan repayments Health 2006 7-751.11 $70 $70 $70 $70
121 Long-term care insurance premiums Health 2005 47-1803.03(b-1) $225 $225 $225 $225
122 Housing relocation assistance Housing 1980
42-2851.05, 42-
3403.05, and 47-
1803.02(a)(2)(R) minimal minimal minimal minimal
123
D.C. and federal government pension
income Income security 1987
47-
1803.02(a)(2)(N) $4,124 $4,228 $4,378 $4,542
124
D.C. and federal government survivor
benefits Income security 1987
47-
1803.02(a)(2)(N) $3,934 $4,033 $4,176 $4,332

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Page xviii
D.C. Income Tax Subtractions (cont.)
125
Disability payments for the permanently
and totally disabled Income security 1985
47-
1803.02(a)(2)(M) $87 $89 $93 $96
126
Income of persons with a permanent and
total disability Income security 2005
47-
1803.02(a)(2)(V) $553 $567 $587 $609
127 Railroad retirement system benefits Income security 1985
47-
1803.02(a)(2)(L) $93 $95 $99 $103
128
Social Security benefits for retired
workers Income security 1985
47-
1803.02(a)(2)(L) $16,877 $17,304 $17,918 $18,587
129
Social Security benefits for survivors and
dependents Income security 1985
47-
1803.02(a)(2)(L) $2,142 $2,196 $2,274 $2,359
130 Social Security benefits for the disabled Income security 1985
47-
1803.02(a)(2)(L) $4,190 $4,296 $4,449 $4,615
131
Environmental savings account
contributions and earnings Natural resources and environment 2001 8-637.03 minimal minimal minimal minimal
132 Rental assistance to police officers Public safety 1993 42-2902 minimal minimal minimal minimal
133
Compensatory damages awarded in a
discrimination case Social policy 2002
47-
1803.02(a)(2)(U) $31 $32 $33 $34
134 Poverty lawyer loan assistance Social policy 2007
47-
1803.02(a)(2)(X) $40 $40 $40 $40
D.C. Income Tax Credits
135
Economic development zone incentives for
businesses Economic development 1988
6-1501, 6-
1502, 6-1504,
and 47-1807.06 $0 $0 $0 $0
136
business income tax exemption and
reduction Economic development 2001 47-1817.06 $15,983 $16,777 $17,491 $18,310
137
employee relocation incentives Economic development 2001 47-1817.02
included in
#136
included in
#136
included in
#136
included in
#136

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Page xix
D.C. Income Tax Credits (cont.)
138
employment incentives Economic development 2001 47-1817.03
included in
#136
included in
#136
included in
#136
included in
#136
139
incentives to employ disadvantaged
workers Economic development 2001 47-1817.05
included in
#136
included in
#136
included in
#136
included in
#136
140
incentives to retrain disadvantaged workers Economic development 2001 47-1817.04
included in
#136
included in
#136
included in
#136
included in
#136
141
Qualified social electronic commerce
companies Economic development 2012
47-1818.01 -
47-1818.08 $0 $0 $1,440 $1,500
142
First-time home purchase for D.C.
government employees Employment 2000 42-2506 $124 $124 $124 $124
143 Job growth tax credit Employment 2010
47-1807.09 and
47-1807.51 -
47-1807.56 $0 $0 $0 $0
144
Paid leave for organ or bone marrow
donors Health 2006
47-1807.08 and
47-1808.08 no estimate no estimate no estimate no estimate
145 Employer-assisted home purchases Housing 2002
47-1807.07 and
47-1808.07 minimal minimal minimal minimal
146 Lower-income, long-term homeownership Housing 2002
47-1806.09 -
47-1806.09f $4 $4 $4 $4
147 Property tax circuit-breaker Housing 1977 47-1806.06 $16,354 $16,853 $18,110 $19,088
148 Earned income tax credit Income security 2000 47-1806.04(f) $54,262 $54,967 $55,737 $56,461
149 Low-income credit Income security 1987 47-1806.04(e) $1,789 $1,789 $1,789 $1,789
150 Brownfield revitalization and cleanup Natural resources and environment 2001 8-637.01 $0 $0 $0 $0
151 Child and dependent care Social policy 1977 47-1806.04(c) $3,575 $3,575 $3,575 $3,575

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Page xx
D.C. Real Property Tax Abatements
152
New or improved buildings used by high-
technology companies Economic development 2001 47-811.03 $35 $36 $37 $38
153
Non-profit organizations locating in
designated neighborhoods Economic development 2010
47-857.11 -
47-857.16 $153 $153 $153 $153
154 Improvements to low-income housing Housing 2002 47-866 $0 $0 $0 $0
155 New residential developments Housing 2002
47-857.01 -
47-857.10 $3,771 $2,105 $1,540 $1,346
156 NoMA residential developments Housing 2009
47-859.01 -
47-859.05 $1,002 $4,212 $4,212 $4,212
157
Preservation of section 8 housing in
qualified areas Housing 2002 47-865 $0 $0 $0 $0
158 Single-room-occupancy housing Housing 1994 42-3508.06 $0 $0 $0 $0
159 Vacant rental housing Housing 1985 42-3508.02 $0 $0 $0 $0
D.C. Real Property Tax Exemptions
160
Development of a qualified supermarket,
restaurant, or retail store Economic development 1988 47-1002(23) $2,383 $2,948 $2,958 $3,684
161
High-technology commercial real estate
database and service providers Economic development 2010 47-4630 $700 $700 $700 $700
162 Educational institutions Education 1942 47-1002(10) $104,195 $104,455 $104,716 $104,978
163 Libraries Education 1942 47-1002(7) $426 $427 $428 $429
164
Embassies, chanceries, and associated
properties of foreign governments General law 1942 47-1002(3) $43,825 $43,935 $44,045 $44,155
165 Federal government property General law 1942 47-1002(1) $839,900 $841,999 $844,904 $846,215
166 Miscellaneous exemptions General law multiple years
Title 47, Chapters
10 and 46 $118,784 $119,081 $119,379 $119,677
167 Hospital buildings Health 1942 47-1002(9) $13,352 $13,386 $13,419 $13,453

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Page xxi
D.C. Real Property Tax Exemptions (cont.)
168 Historic property Housing 1974
47-842 -
47-844 $9 $10 $10 $10
169 Homestead deduction Housing 1978 47-850 $57,264 $58,982 $60,751 $62,574
170
Lower-income homeownership households
and cooperative housing associations Housing 1983 47-3503 $9,711 $9,735 $9,760 $9,784
171
Multi-family and single-family rental and
cooperative housing for low- and moderate-
income persons Housing 1978 47-1002(20) $1,080 $1,082 $1,085 $1,088
172 Nonprofit housing associations Housing 1983 47-3505 $10,791 $10,818 $10,845 $10,872
173 Nonprofit affordable housing developers Housing 2012 47-1005.02 $200 $300 $400 $500
174 Resident management corporations Housing 1992 47-1002(24) $0 $0 $0 $0
175 Correctional Treatment Facility Public safety 1997 47-1002(25) $3,422 $3,487 $3,602 $3,721
176 Art galleries Social policy 1942 47-1002(6) $2,374 $2,380 $2,386 $2,392
177 Cemeteries Social policy 1942 47-1002(12) $5,723 $5,728 $5,734 $5,740
178 Charitable organizations Social policy 1942 47-1002(8) $14,534 $14,571 $14,607 $14,644
179 Churches, synagogues, and mosques Social policy 1942 47-1002(13) $60,626 $60,778 $60,930 $61,082
180
Washington Metropolitan Area Transit
Authority properties Transportation 1966 9-1107.01 $9,408 $9,432 $9,456 $9,479
D.C. Real Property Tax Credits
181
Qualified social electronic commerce
companies Economic development 2012
47-1818.01 -
47-1818.08 $0 $0 $1,510 $1,580
182
First-time homebuyer credit for D.C.
government employees Employment 2000 42-2506 $313 $318 $329 $340
183 Assessment increase cap Housing 2001 47-864 $17,177 $18,310 $18,859 $19,425
184
Senior citizens and persons with
disabilities Housing 1986 47-863 $21,520 $21,574 $21,628 $21,682
185 Brownfield revitalization and cleanup Natural resources and environment 2001 8-637.01 $0 $0 $0 $0
186
Condominium and cooperative trash
collection Natural resources and environment 1990
47-872 and
47-873 $5,327 $5,460 $5,597 $5,737
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Page xxii
D.C. Real Property Tax Deferrals, Rebates, and Multiple Categories
187
Economic development zone incentives for
real property owners Economic development 1988
6-1501 -
6-1503 $0 $0 $0 $0
188 Public charter school tax rebate Education 2005 47-867 $1,296 $1,321 $1,364 $1,409
189 Homeowners in enterprise zones Housing 2002
47-858.01 -
47-858.05 $0 $0 $0 $0
190 Low-income homeowners Housing 2005 47-845.02 $0 $0 $0 $0
191 Low-income, senior-citizen homeowners Housing 2005 47-845.03 $3 $4 $4 $4
D.C. DEED RECORDATION AND TRANSFER TAX
Deed Recordation and Transfer Tax Exemptions
192 Educational institutions Education 1962 and 1980
42-1102(3) and
47-902(3) $516 $518 $519 $520
193 Bona-fide gifts to the District of Columbia General law 2011 47-902(24) $0 $0 $0 $0
194
Embassies, chanceries, and associated
properties of foreign governments General law 1962 and 1980
42-1102(3) and
47-902(3) $1,064 $1,067 $1,069 $1,072
195 Federal government General law 1962 and 1980
42-1102(2) and
47-902(2) $52 $53 $53 $54
196
Other properties exempt from real
property taxation General law 1962 and 1980
42-1102(3) and
47-902(3) $687 $689 $689 $690
197
Special act of Congress (recordation tax
only) General law 1962 42-1102(4) $375 $376 $376 $377
198 Cooperative housing associations Housing 1983
42-1102(14),
47-3503(a)(2),
47-3503(a)(3),
47-902(11), and
47-3503(b)(2) $267 $272 $278 $283

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Page xxiii
D.C. Deed Recordation and Transfer Tax Exemptions (cont.)
199
Inclusionary zoning program (transfer tax
only) Housing 2007 47-902(23) $7 $30 $30 $30
200 Lower-income homeownership households Housing 1983
42-1102(12),
47-3503(a)(1),
47-3503(a)(3),
47-902(9), and
47-3503(b)(1) $107 $107 $107 $108
201 Nonprofit housing associations Housing 1983
42-1102(13),
47-3505(c),
47-902(10), and
47-3505(b) $160 $160 $160 $161
202 Nonprofit affordable housing developers Housing 2012 42-1102(32) $155 $155 $156 $156
203 Resident management corporations Housing 1992
42-1102(20),
47-
3505.01(b)(1),
47-902(15), and
47-
3506.01(b)(2) $0 $0 $0 $0
204 Charitable organizations Social policy 1962 and 1980
42-1102(3) and
47-902(3) $2,004 $2,009 $2,014 $2,019
205 Churches, synagogues, and mosques Social policy 1962 and 1980
42-1102(3) and
47-902(3) $129 $129 $130 $130
206
Tax-exempt entities subject to a long-term
lease Tax administration and equity 2003
42-1102(27) and
47-902(21) no estimate no estimate no estimate no estimate

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Page xxiv
D.C. SALES TAX
Sales Tax Exemptions
207 Energy products used in manufacturing Economic development 1949
47-2005(11) and
(11A) $4,388 $4,563 $4,728 $4,889
208 Internet access service Economic development 1999 47-2001(n)(2)(F) $5,691 $5,885 $6,103 $6,341
209
Materials used in development of a
qualified supermarket Economic development 2000 47-2005(28) $817 $845 $876 $908
210 Professional and personal services Economic development 1949
47-
2001(n)(2)(B) $261,782 $272,353 $282,054 $291,644
211
certain sales Economic development 2001
47-
2001(n)(2)(G) $672 $695 $721 $749
212
technology purchases Economic development 2001 47-2005(31) $179 $187 $194 $203
213
Transportation and communication
services Economic development 1949
47-
2001(n)(2)(A) $46,974 $48,571 $50,368 $52,332
214 Federal and D.C. governments General law 1949 47-2005(1) $194,110 $200,710 $208,136 $216,253
215 Medicine, drugs, and medical devices Health 1949
47-2005(14) and
(15) $16,294 $16,848 $17,471 $18,153
216 Groceries Social policy 1949
47-
2001(n)(2)(E) $54,382 $56,231 $58,312 $60,586
217 Materials used in war memorials Social policy 1957 47-2005(16) $0 $0 $0 $0
218 Nonprofit (501(c)(4)) organizations Social policy 1987 47-2005(22) $33,171 $34,299 $35,568 $36,955
219 Semi-public institutions Social policy 1949 47-2005(3) $49,377 $51,056 $52,945 $55,010
220 Miscellaneous Tax administration and equity multiple years 47-2005 no estimate no estimate no estimate no estimate
221 Public utility companies Tax administration and equity 1949 47-2005(5) $81,699 $84,477 $87,602 $91,019
222 State and local governments Tax administration and equity 1949 47-2005(2) minimal minimal minimal minimal
223 Valet parking services Transportation 2002
47-
2001(n)(1)(L)(iv-I)
and 47-
2001(n)(2)(H) $143 $148 $153 $159

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Page xxv
D.C. INSURANCE PREMIUMS TAX
Insurance Premiums Tax Credit
224
Certified capital investment by insurance
companies Economic development 2004 31-5233 $8,804 $2,859 $0 $0
D.C. PERSONAL PROPERTY TAX
Personal Property Tax Exemptions
225 Digital audio radio satellite companies Economic development 2000 47-1508(a)(8) no estimate no estimate no estimate no estimate
226 Qualified high-technology companies Economic development 2001 47-1508(a)(10) $100 $104 $108 $113
227 Qualified supermarkets Economic development 2000 47-1508(a)(9) $312 $316 $319 $322
228 Solar energy systems Natural resources and environment 2013 47-1508(a)(11) $124 $125 $126 $127
229 Cogeneration systems Natural resources and environment 2013 47-1508(a)(12) $0 $0 $0 $1,370
230 Non-profit organizations Social policy 1902 47-1508(a)(1) $4 $4 $4 $4
231
Public utility and toll telecommunications
providers Tax administration and equity 2001 47-1508(a)(3A) $6 $6 $6 $6
232 Wireless telecommunication companies Tax administration and equity 1998 47-1508(a)(7) minimal minimal minimal minimal
233
Works of art lent to the National Gallery
by non-residents Tax administration and equity 1950 47-1508(a)(2) $0 $0 $0 $0
234 Motor vehicles and trailers Transportation 1954 47-1508(a)(3) $2,437 $2,461 $2,486 $2,511

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Part II: Local Tax Expenditures
________________________________________________________________________________________________

Page 27

PART I: FEDERAL CONFORMITY TAX EXPENDITURES
________________________________________________________________________________________________

Page 28
Income Tax
Exclusions

1. Capital gains on assets transferred at death

Internal Revenue Code Sections: 1001, 1014, 1023, 1040, 1221, and 1222
Federal Law Sunset Date: None
Year Enacted in Federal Law: 1921
Total
(Dollars in thousands) FY 2014 FY 2015 FY 2016 FY 2017
Corporate Income Tax Loss $0 $0 $0 $0
Personal Income Tax Loss $29,330 $31,270 $33,633 $36,178
Total $29,330 $31,270 $33,633 $36,178

DESCRIPTION: When property is transferred upon an owners death, unrealized capital gains
on the property are excluded from taxable income. The new basis of taxation for the heir is the
market value of the property when the owner died, rather than the original cost of the asset (this is
sometimes called a step-up in basis). This policy departs from the usual rules for capital gains,
which are taxed on the difference between the current price and the original cost of the asset.

PURPOSE: Although the original rationale for the exclusion is not clear, a justification currently
used is that death should not trigger a recognition of income.
10
One author notes that, Part of the
rationale for step-up in basis was that the gains were subject to the estate tax.
11
In addition, there
would be an administrative burden both for taxpayers and the IRS to determine the original price
of assets that were purchased long ago.

IMPACT: The Congressional Research Service states that, The exclusion of capital gains at
death is most advantageous to individuals who need not dispose of their assets to achieve
financial liquidity. Generally speaking, these individuals tend to be wealthier. The deferral of tax
on the appreciation involved, combined with the exemption for the appreciation before death, is a
significant benefit for those investors and their heirs.
12

With regard to efficiency, the failure to tax capital gains transferred at death encourages lock-in
of assets (holding the same assets even though portfolio change might otherwise be more
beneficial).
13
CRS points out that, Lower capital gains taxes may disproportionately benefit real
estate investments and may cause corporations to retain more earnings than would otherwise be

10
U.S. Senate, Committee on the Budget, Tax Expenditures: Compendium of Background Material on
Individual Provisions, Senate Print 112-45, prepared by the Congressional Research Service (December
2012), p. 431.

11
Gerald Auten, Capital Gains Taxation, in The Encyclopedia of Taxation and Tax Policy, Joseph
Cordes, Robert Ebel, and Jane Gravelle, eds. (Washington, D.C.: The Urban Institute Press, 2005), p. 47.

12
U.S. Senate, Committee on the Budget, p. 430.

13

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Page 29
the case, causing efficiency losses. At the same time, lower capital gains taxes reduce the
distortion that favors corporate debt over equity, which produces an efficiency gain.
14

14
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Page 30
Income Tax
Exclusions

2. Capital gains on assets transferred as a gift

Internal Revenue Code Sections: 1015
Total
Personal Income Tax Loss -$1,989 -$5,116 $2,274 $3,126
Total -$1,989 -$5,116 $2,274 $3,126

DESCRIPTION: When property is transferred as a gift during the lifetime of the owner,
unrealized capital gains on the property are excluded from taxable income. The new basis of
taxation is the original cost of the asset paid by the donor, but the tax is not imposed upon the
transfer. In addition, tax can be avoided entirely if the recipient holds the asset until death, when
it can be transferred to an heir without triggering capital gains taxation.

PURPOSE: Although the original rationale for the exclusion is not clear, a justification currently
used is that a gift should not trigger a recognition of income.
15
In addition, another rationale
might be that the transfer is subject to the gift tax.

IMPACT: The impact of the capital gains tax exclusion for gifts is somewhat similar to the
exclusion for assets transferred at death (see Tax Expenditure #1, described on the previous
pages). The exclusion of capital gains on gifts will be most advantageous to individuals who do
not need to dispose of their assets to achieve financial liquidity, and to those who have more
valuable assets. These individuals tend to be wealthier. In addition, the exclusion for capital
gains on gifts encourages the lock-in of assets (maintaining the same assets even though
portfolio change might otherwise be more beneficial).

15

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Page 31
Income Tax
Exclusions

3. Cash accounting, other than agriculture

Internal Revenue Code Sections: 446 and 448
Corporation Personal Total
Corporate Income Tax Loss too small too small too small too small
Total $1,665 $1,804 $1,804 $1,943
Note: Too small means that the nationwide federal revenue impact was estimated as $50 million or less.

DESCRIPTION: Employee-owned personal service businesses
16
and other small businesses with
average annual gross receipts of less than $5 million for the last three years have the option of
using the cash method of accounting instead of the accrual method. Using the cash method for tax
purposes effectively defers corporation and personal income taxes by allowing qualified
businesses to record income when it is received rather than when it is earned (the accrual
method).

PURPOSE: The purpose of the exclusion is to simplify record keeping and eliminate an
additional drain on the working capital of small businesses.

IMPACT: Small businesses and personal service corporations benefit from this provision. The
Congressional Research Service states that cash accounting allows businesses to exercise greater
control over the timing of receipts and payments for expenses. By shifting income or deductions
from the current tax year to a future year, taxpayers can defer the payment of income taxes or
take advantage of expected or enacted reductions in tax rates. In addition, the cash method of
accounting has the advantage of lower compliance costs and greater familiarity for individuals
and small firms that are permitted to use it for tax purposes.
17

16
This category includes businesses in the fields of health, law, accounting, engineering, architecture,
actuarial science, performing arts, or consulting.

17

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Page 32
Income Tax
Exclusions

4. Credit union income

Internal Revenue and U.S. Code Sections: 501(c)(14) and 12 USC 1768
CTotal
Personal Income Tax Loss $0 $0 $0 $0
Total $405 $463 $521 $579

DESCRIPTION: The income of a credit union is exempt from corporate income tax. Credit
unions are non-profit cooperatives organized by people with a common bond (such as
membership in the same profession) that distinguishes them from the general public. Members of
the credit union pool their funds to make loans to one another. The earnings that the credit union
distributes to its depositors (as opposed to earnings that it retains) are subject to taxation.

Credit unions initially gained tax-exempt status in 1937 when they were included in a broader
exemption for domestic building and loan associations. In 1951, a specific tax exemption for
credit unions was enacted.

PURPOSE: According to the U.S. Government Accountability Office (GAO), credit unions
continue to be exempt because of their cooperative, not-for-profit structure, which is distinct
from other depository institutions, and because credit unions have historically emphasized serving
people of modest means.
18

IMPACT: Credit unions and their members benefit from this provision. The Congressional
Research Service states that, For a given addition to retained earnings, this tax exemption
permits credit unions to pay members higher dividends and charge members lower interest rates
on loans. Over the past 25 years, this tax exemption may have contributed to the more rapid
growth of credit unions compared to other depository institutions.
19

Proponents of the exemption emphasize that credit unions are directed by volunteers for the
purpose of serving their members, rather than maximizing profits. CRS also points out that,
[S]upporters argue that credit unions are subject to certain regulatory constraints not required of
other depository institutions and that these constraints reduce the competitiveness of credit
unions. For example, credit unions may only accept deposits of members and lend only to
members, other credit unions, or credit union organizations.
20

18
U.S. Government Accountability Office, Financial Institutions: Issues Regarding the Tax-Exempt Status
of Credit Unions, Highlights of GAO-06-220T, Testimony before the Committee on Ways and Means,
House of Representatives, November 3, 2005.

19
U.S. Senate, Committee on the Budget, pp. 317-318.

20

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Page 33

On the other hand, Proponents of taxation argue that deregulation has caused extensive
competition among all depository institutions, including credit unions, and that the tax exemption
gives credit unions an unwarranted advantage over other depository institutions. They argue that
depository institutions should have a level playing field in order for market forces to allocate
resources efficiently.
21
The U.S. Treasury Departments 1984 tax reform report to President
Reagan proposed repealing the exclusion of credit union income on precisely those grounds.
22

It is also not clear to what extent credit unions serve people of low or moderate incomes and pass
on the savings from the tax exclusion to credit union members. In testimony to the U.S. House
Committee on Ways and Means in November 2005, a GAO official stated that, [S]ome studies,
including one of our own, indicate that credit unions serve a slightly lower proportion of
households with low and moderate incomes than banks.
23

21

22
U.S. Treasury Department, Tax Reform for Fairness, Simplicity, and Economic Growth, The Treasury
Department Report to the President, Volume 1, Overview (November 1984), p. 133.

23
U.S. Government Accountability Office, Financial Institutions: Issues Regarding the Tax-Exempt Status
of Credit Unions, Statement of Richard Hillman, Managing Director, Financial Markets and Community
Investments, before the Committee on Ways and Means, House of Representatives (GAO-06-220T),
November 3, 2005, p. 9.

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Income Tax
Exclusions

5. Distribution from redemption of stock to pay taxes imposed at
death

CTotal
Personal Income Tax Loss too small too small too small too small
Total too small too small too small too small

DESCRIPTION: When a shareholder in a closely-held business dies, a partial redemption of the
stock (selling the stock back to the corporation) is treated as a sale or exchange of an asset
eligible for long-term capital gain treatment, rather than as dividend income. The treatment of the
redemption as a capital gain means that there is a step up in basis: the stock is valued for
purposes of federal income tax as of the date that it was transferred to the decedents heir or heirs,
rather than the value at the initial time of purchase by the decedent. As a result, there will be little
or no federal tax due on the redemption (depending on the exact timing of the redemption).
24

In order to qualify for this tax benefit, at least 35 percent of the decedents estate must consist of
the stock of the corporation. The benefits of the exclusion cannot exceed the estate taxes and
expenses (funeral and administrative) that are incurred by the estate.

PURPOSE: According to the Congressional Research Service, this provision was adopted due to
congressional concern that estate taxes would force some estates to liquidate their holdings in a
family business. There was further concern that outsiders could join the business, and the
proceeds from any stock sales used to pay taxes would be taxable income under the income
tax.
25

IMPACT: Family businesses benefit from this provision, because it creates an incentive to sell
stock back to the business in order to pay estate taxes. CRS observes that only a small percentage
of businesses (approximately 3.5 percent) are subject to the estate tax, so a small number of
wealthy families stand to benefit from the exclusion.
26
CRS adds that, There are no special
provisions in the tax code, however, for favorable tax treatment of other needy redemptions, such
as to pay for medical expenses. To take advantage of this provision the decedents estate does not

24
There could be some tax liability if the stock appreciates between the time it is bequeathed to the heir or
heirs and the time it is sold back to the closely-held business.

25

26

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Page 35
need to show that the estate lacks sufficient liquid assets to pay taxes and expenses. Furthermore,
the proceeds of the redemption do not have to be used to pay taxes or expenses.
27

27
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Income Tax
Exclusions

6. Gain on like-kind exchanges

Internal Revenue Code Section: 1031
Total $4,263 $4,405 $4,690 $4,974

DESCRIPTION: When business or investment property is exchanged for property of a like
kind, no gain or loss is recognized on the exchange and therefore no tax is paid on any
appreciation in the propertys value at the time of the exchange. This exclusion contrasts to the
general rule that any sale or exchange of money or property is a taxable event.

PURPOSE: According to the Congressional Research Service, the rationale for allowing these
tax-free exchanges is that the investment in the new property is merely a continuation of the
investment in the old.
28

IMPACT: CRS states that, The like-kind exchange rules have been liberally interpreted by the
courts to allow tax-free exchanges of property of the same general type but of very different
quality and use. All real estate, in particular is considered like-kind The provision is very
popular with real estate interests, some of whom specialize in arranging property exchanges. It is
useful primarily to persons who wish to alter their real estate holdings without paying tax on their
appreciated gain. Stocks and financial instruments are generally not eligible for this provision, so
it is not useful for rearranging financial portfolios.
29

In addition, the exclusion serves to simplify transactions and make it less costly for businesses
and investors to replace property. Taxpayers gain further benefit from the loose definition of
like-kind, because they can also switch their property holdings to types they prefer without tax
consequences. This might be justified as reducing the inevitable bias a tax on capital gains causes
against selling property, but it is difficult to argue for restricting the relief primarily to those
taxpayers engaged in sophisticated real estate transactions.
30
The like-kind rule creates an
economic distortion by encouraging investment in land and buildings even when real estate might
not represent the most productive use of capital. A New York Times article stated that, Because

28

29

30

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Page 37
it allows farmers to avoid capital gains taxes on land swaps, the tax break provides an incentive to
sell farmland coveted by developers and buy property in less desirable and more remote areas.
31

31
David Kocieniewski, Major Companies Push the Limits of a Tax Break, The New York Times, January
6, 2013.
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Page 38
Income Tax
Exclusions

7. Imputed interest

Internal Revenue Code Sections: 163(e), 483, 1274 and 1274A
Personal Total
Total $420 $420 $420 $490

DESCRIPTION: For debt instruments that do not bear a market rate of interest, the Internal
Revenue Service assigns or imputes a market rate to estimate interest payments for tax
purposes. The imputed interest must be included as income to the recipient and is deducted by
the payer. There are several exceptions to this general rule, covering debt associated with the sale
of property when the total sales price is no more than $250,000; the sale of farms or small
businesses by individuals when the sales price is no more than $1 million; and the sale of a
personal residence. An interest rate greater than 9 percent may not be assigned to debt
instruments given in exchange for real property for amounts less than an inflation-adjusted
maximum (currently $3.3 million or $4.6 million, depending on the debt instrument used).

The tax expenditure is the revenue loss caused by the exceptions to the imputed interest rule listed
above. A common example of this exemption is a low-interest, no-interest, or gift loan involved
in the sale of property between family members.

PURPOSE: The purpose of the exclusion is to reduce the tax burden on the sales of homes, small
businesses, and farms, and to allow buyers to finance the purchase of property that would
otherwise be unaffordable under prevailing market rates and conditions. Essentially, the
exclusion allows a limited set of transactions to take place without restrictions on seller financing.
The restrictions on the exclusion are intended to prevent the tax avoidance that may result if the
seller charges an artificially high sales price (to shift income toward tax-favored capital gains)
and an artificially low interest rate (to shift income out of taxable interest payments).

IMPACT: Sellers of residences, small businesses, and farms who would have to pay tax on
interest they do not charge, and otherwise will not receive, benefit from this provision. The
imputed interest rules have been less important since the Tax Reform Act of 1986 took effect,
because tighter depreciation rules limited the arbitrage opportunities from seller-financed
transactions.
32

32
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Income Tax
Exclusions

8. Interest on small-issue qualified private-activity bonds

Internal Revenue Code Sections: 103, 141, 144, and 146
Cl Total
Total $366 $366 $366 $366

DESCRIPTION: Interest income on state and local bonds that are used to finance loans of $1
million or less for the construction of private manufacturing facilities is tax-exempt. These
bonds, which are known as small-issue industrial development bonds (IDBs) are classified as
private-activity bonds rather than governmental bonds because a substantial portion of the
benefits accrues to private individuals or businesses.

The $1 million loan limit for a single project may be raised to $20 million if the aggregate amount
of related capital expenditures (including those financed by tax-exempt bond proceeds) made
over a six-year period is not expected to exceed $20 million. Total borrowing for any borrower is
limited to $40 million. The small-issue IDBs are also subject to caps on the volume of private-
activity bonds that each state can issue.

State and local governments initially faced no restrictions on the use of tax-exempt bonds for
economic development. Congress first imposed limits on the amount of the bond issuance and
the size of the projects supported in 1968.

PURPOSE: The Congressional Research Service notes that small-issue IDBs are supported by
Congress as a way to promote investment in manufacturing.
33
Because the interest on the bonds
is tax-exempt, buyers are willing to accept lower interest rates for the small-issue IDBs than they
would for taxable securities, which in return reduces the cost of financing for the manufacturers.

IMPACT: CRS states that, It is not clear that the nation benefits from these bonds. Any
increase in investment, jobs, and tax base obtained by communities from their use of these bonds
likely is offset by the loss of jobs and tax base elsewhere in the economy. National benefit could
arise from relocating jobs and tax base to achieve social or distributional objectives. The use of
the bonds, however, is not targeted to specific geographic areas that satisfy explicit federal
criteria such as median income or unemployment
34
CRS also points out that, With a greater
supply of public bonds, the interest rate on bonds necessarily increases to lure investors. In
addition, expanding the availability of tax-exempt bonds also increases the assets available to
individuals and corporations to shelter their income from taxation.
35

33

34

35
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Page 40
Income Tax
Exclusions

9. Magazine, paperback and record returns


DESCRIPTION: Generally, if a buyer returns goods to the seller, the sellers income is reduced
in the year in which the items are returned. This tax expenditure involves an exemption from this
rule for publishers and distributors of magazines, paperbacks, and records (records include discs,
tapes, and similar objects that contain pre-recorded sounds).

Publishers and distributors may elect to exclude from corporate or personal taxable income any
goods sold during a tax year that are returned shortly after the close of the tax year. Specifically,
magazines must be returned within two months and 15 days after the end of the tax year, and
paperbacks and records must be returned within four months and 15 days. This allows publishers
and distributors to sell more copies to wholesalers and retailers than they expect will be sold to
consumers.

PURPOSE: The purpose of the exclusion is to avoid taxing publishers and distributors of
magazines, paperbacks, and records on accrued income when goods that are sold in one year are
returned after the close of the year.

IMPACT: Publishers and distributors of magazines, paperbacks and records benefit from this
provision. The Congressional Research Service notes that, The special tax treatment granted to
publishers and distributors of magazines, paperbacks, and records is not available to producers
and distributors of other goods. On the other hand, publishers and distributors of magazines,
paperbacks, and records often sell more copies to wholesalers and retailers than they expect will
be sold to consumers.
36
CRS also states that the exclusion mainly benefits large publishers and
distributors.
37
In 1984, the U.S. Treasury Departments tax reform report to President Reagan
recommended repealing the exclusion as an unnecessary subsidy.
38

36

37

38
U.S. Department of the Treasury, Tax Reform for Fairness, Simplicity, and Economic Growth, Volume
1, Overview, p. 150.
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Income Tax
Exclusions

10. Small business stock gains

Personal Income Tax Loss $694 $971 $971 $1,110
Total $694 $971 $971 $1,110

DESCRIPTION: Individuals and non-corporate business taxpayers are allowed to exclude from
gross income a portion of the gain from the sale or exchange of qualified small business stock.
The exclusion is 50 percent for qualified stock issued after August 10, 1993, but temporary
provisions increased the exclusion to 75 percent for stock acquired from February 18, 2009, to
September 27, 2010; and to 100 percent for stock acquired from September 28, 2010, to
December 31, 2013. Because the gain on the sale of small business stock is ordinarily 28 percent,
a 50 percent exclusion yields an effective tax rate of 14 percent.

Qualified small business stock must be acquired by a non-corporate taxpayer at the time of
original issue and held for at least five years. The stock must be issued by a C corporation that
has no more than $50 million in gross assets and employs at least 80 percent of its assets during
the five-year holding period. In addition, the corporation must be a specialized small business
investment company in any line of business except for health care, law, engineering,
architecture, food service, lodging, farming, insurance, finance, or mining.

The exclusion is limited to the greater of $10 million, less any cumulative gain excluded by the
taxpayer in prior years, or 10 times the taxpayers basis in the stock.

PURPOSE: The Congressional Research Service states that the exclusion is intended to
facilitate the formation and growth of small firms involved in developing new manufacturing
technologies and organized as C corporations by increasing their access to capital. It does this by
giving investors a robust incentive to acquire a sizable equity stake in such firms.
39

IMPACT: CRS posits that, Most of the benefits are captured by small business owners and
high-income individuals with relatively high tolerances for risk.
40
Nevertheless, the tax
expenditure may have less impact on access to capital than it once did, because alternative
investments are now much attractive due to the reduction in long-term capital gains rates, which
range from 0 to 15 percent depending on an individuals tax bracket. CRS adds that, (N)o study
has been done that assesses (the exclusions) impact on the cash flow, capital structure or
investment behavior of firms issuing the stock.
41

39

40

41
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Income Tax
Exclusions

11. Discharge of certain student loan debt

Internal Revenue and U.S. Code Sections: 108(f), 20 U.S.C. 1087ee(a)(5) and 42 U.S.C.
2541-1(g)(3)
on Personal Total
Total $244 $244 $244 $244

DESCRIPTION: In general, canceled or forgiven debt, or debt that is repaid on a borrowers
behalf, is considered taxable income. However, federal law allows an exclusion for the discharge
of student loan debt by the federal, state, or local governments; public benefit corporations that
operate a state, county, or municipal hospital; and qualified educational institutions for an
individual who agrees to work in a certain type of occupation for a specified period of time.

Programs covered by the exclusion include loan forgiveness for teachers and public service
employees under the federal direct student loan program, loan forgiveness for teachers under
federal guaranteed loan programs, and loan cancelation for public service employees under the
federal Perkins Loan program. Also eligible for the exclusion are loan payments made on behalf
of health professionals who work in shortage areas under the National Health Service Corps Loan
Repayment Program or state programs eligible for Public Health Service Act funding, as well as
loan payments or forgiveness offered by state programs that recruit health care professionals to
underserved or shortage areas. Finally, certain law school loan repayment programs made by
non-federal lenders are also covered.

PURPOSE: The purpose of the exclusion is to encourage individuals to work in certain high-
priority occupations (such as public health or education) or in certain locations (such as health
professional shortage areas) by providing student loan forgiveness as an incentive.

IMPACT: Individuals with student loans forgiven under the program benefit from this provision.
The industries and geographic areas targeted for the incentive may also benefit. The
Congressional Research Service states that, The value to an individual of excluding the
discharge of student loan indebtedness from gross income depends on that individuals marginal
tax rate in the tax year in which the benefit is realized ... In many instances, borrowers employed
in these types of professions will be in lower tax brackets than if they had taken higher-paying
jobs elsewhere.
42
CRS also points out that the impact of loan forgiveness programs and the tax
exclusion for discharged student loan debt on occupational choices is not known.
43

42

43
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Income Tax
Exclusions

12. Earnings of Coverdell education savings accounts

Total $122 $122 $244 $365

DESCRIPTION: A taxpayer may establish a Coverdell education savings account (ESA) to pay
for the qualified education expenses of a named beneficiary.
44
Qualified expenses include tuition,
fees, books, supplies, and room and board for elementary, secondary, and higher education.
Annual contributions to a particular beneficiary cannot exceed $2,000 and cannot be made after
the beneficiary reaches age 18 unless he or she has special needs. The annual contribution is not
deductible, but any earnings on the contributions are tax-free until they are distributed.

The maximum allowable contribution is reduced for taxpayers with annual incomes over $95,000
and is phased out completely at an annual income level of $110,000 (the comparable thresholds
are $190,000 and $210,000 for a joint return). The portion of the distribution attributed to
principal is not taxed, but the earnings may be taxed depending on the amount of qualified higher
education expenses that the beneficiary has incurred.

A contributor may fund multiple accounts for the same beneficiary (subject to the overall $2,000
annual limit) and a student may be the designated beneficiary of multiple accounts. With the
exception of accounts for special needs beneficiaries, Coverdell ESA balances must be fully
distributed by the time beneficiaries reach the age of 30.

PURPOSE: According to the Congressional Research Service, These benefits reflect
congressional concern that families are having increasing difficulty paying for college. They also
reflect an intention to subsidize middle-income families that otherwise do not qualify for much
need-based federal student aid.
45

IMPACT: CRS points out that, Families that have the wherewithal to save are more likely to
benefit. Whether families will save additional sums might be doubted. Tax benefits for
Coverdell ESAs are not related to the students cost of attendance or other family resources, as is
most federal student aid for higher education. Higher-income families also are more likely than
lower-income families to establish accounts for their childrens K-12 education expenses.
46

44
The program is named after the late Senator Paul Coverdell of Georgia, who was the chief sponsor of the
authorizing legislation. Coverdell ESAs were previously known as Education IRAs.

45

46
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Page 44
Income Tax
Exclusions

13. Earnings of qualified tuition programs

Total $1,096 $1,340 $1,462 $1,583

DESCRIPTION: There are two types of qualified tuition programs (QTPs) that allow people to
pay in advance or save for college expenses for designated beneficiaries: (1) prepaid tuition plans,
and (2) college savings plans. Prepaid tuition plans allow account owners to make tuition
payments for beneficiaries at current prices, thereby providing a hedge against inflation. College
savings plans allow account owners to save and invest money on a tax-favored basis that can be
used to pay for higher education expenses (tuition and fees, books, supplies, room and board).

The District of Columbia sponsors a college savings plan, but does not offer a prepaid tuition
plan. Nevertheless, it is possible to participate in a prepaid tuition plan outside of ones current
state of residence. Only states can sponsor college savings accounts, but both states and
institutions of higher education offer prepaid tuition plans.

Contributors can fund multiple QTP accounts for the same beneficiary in different states, and an
individual may be the beneficiary of accounts established by different contributors. Sponsors can
establish their own restrictions, and the specifics of each plan vary from state to state. One
difference between QTPs and Coverdell education savings accounts (see tax expenditure #12 on
the previous page) is that there are no income restrictions or annual contribution limits for QTPs.
Individuals can contribute to QTPs and Coverdell plans during the same year.

Contributions to QTPs are taxable, but the earnings on contributions as well as the distributions
are free from federal income tax. Taxpayers must reduce their QTP exclusion by the amount of
any other tax-free educational assistance. Non-qualifying distributions are subject to a 10 percent
penalty, and the earnings share of a non-qualifying distribution is subject to federal income tax.

PURPOSE: The purpose of the exclusion is to help families save for higher education.

IMPACT: The Congressional Research Service states that the benefits of QTPs are generally
limited to higher-income families who have the resources to save for college and face higher
marginal tax rates that increase the value of the tax savings.
47
Urban Institute researchers have
questioned whether the plans have an impact on college savings because higher-income families
have the resources to set aside funding for higher education without the tax incentives.
48

47

48
Elaine Maag and Katie Fitzpatrick, Federal Financial Aid for Higher Education: Programs and
Prospects, Urban Institute discussion paper issued January 2004 (available at www.urban.org), pp. 24-25.
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Income Tax
Exclusions

14. Employer-provided education assistance

Corporate Income Tax Loss $0 $0 sunset sunset
Personal Income Tax Loss $1,073 $1,073 sunset sunset
Total $1,073 $1,073 sunset sunset

DESCRIPTION: An employee may exclude from income certain amounts paid by an employer
for education assistance, including tuition, fees, and books. The maximum exclusion is $5,250
per year. Any excess is part of an employees gross income and is subject both to income and
payroll taxes. The exclusion applies whether the employer pays the expenses, reimburses the
employee for expenses, or provides instruction directly. The coursework does not have to be job-
related, but classes involving sports, games, or hobbies are eligible only if they are job-related.

PURPOSE: The purpose of the exclusion is to encourage employers to offer education assistance
to their employees.

IMPACT: The Congressional Research Service states that, The exclusion allows certain
employees, who otherwise might be unable to do so, to continue their education. The value of the
exclusion is dependent upon the amount of educational expenses furnished and the marginal tax
rate.
49
CRS adds that, The availability of employer educational assistance encourages
employer investment in human capital, which may be inadequate in a market economy because of
spillover effects (i.e., the benefits of the investment extend beyond the individuals undertaking
additional education and the employers for whom they work).
50
The following groups of
employees are much more likely to receive employer-provided educational assistance than other
workers: employees in management, professional, and related jobs; full-time employees;
employees who belong to labor unions; employees whose wages are in the top half of the
earnings distribution; and employees at firms with 100 or more employees.
51

President Bushs Advisory Panel on Federal Tax Reform recommended repealing this exclusion
(as well as several other exclusions for fringe benefits) because, The favorable tax treatment of
fringe benefits results in an uneven distribution of the tax burden as workers who receive the
same amount of total compensation pay different amounts of tax depending on the mix of cash
wages and fringe benefits.
52

49

50

51

52
The Presidents Advisory Panel on Federal Tax Reform, Simple, Fair, and Pro-Growth: Proposals to Fix
Americas Tax System (November 2005), p. 85.
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Page 46
Income Tax
Exclusions

15. Employer-provided tuition reduction

Internal Revenue Code Sections: 117(d)
Cl Total
Total $179 $179 $179 $268

DESCRIPTION: Tuition reductions for employees of educational institutions may be excluded
from federal taxable income if the reductions do not represent payment for services. The
exclusion also applies to tuition reductions for an employees spouse and dependent children.

PURPOSE: The Congressional Research Service states that, Language regarding tuition
reductions was added by the Deficit Reduction Act of 1984 as part of legislation codifying and
establishing boundaries for tax-free fringe benefits; similar provisions had existed in regulations
since 1956.
53

IMPACT: CRS notes that, The exclusion of tuition reductions lowers the net cost of education
for employees of educational institutions Tuition reductions are provided by education
institutions to employees as a fringe benefit, which may reduce costs of labor and turnover. In
addition, tuition reductions for graduate students providing research and teaching services for the
educational institution also contribute to reducing the education institutions labor costs. Both
employees and graduate students may view the reduced tuition as a benefit of their employment
that encourages education. The exclusion may serve to in effect pass some of the education
institutions labor costs on to other taxpayers.
54

53
U.S. Senate, Committee on the Budget, pp. 666.

54
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Income Tax
Exclusions

16. Interest on education savings bonds

orporation Personal Total
Note: too small means that the nationwide federal revenue impact was estimated as $50 million or less.

DESCRIPTION: Part or all of the interest earned on U.S. Series EE or Series I savings bonds can
be excluded from taxable income if the bonds are used to finance higher education expenses for
the taxpayer, the taxpayers spouse, or the taxpayers dependents. The bonds must have been
issued after 1989, and the owner must have been at least 24 years old at the time of issuance. The
proceeds must be used for qualified higher education expenses (which generally cover tuition and
fees, but not room and board) in the same year that they are redeemed.

In tax year 2012, a full exclusion was allowed for taxpayers with income less than $72,850
(single) and $109,250 (married). The exclusion was phased out through incomes up to $87,850
(single) and $139,250 (married). Taxpayers with incomes above those levels did not qualify for
any exclusion. The phase-out thresholds are adjusted annually for inflation.

PURPOSE: The purpose of the exclusion is to encourage lower- and middle-income families to
save for their childrens college education.

IMPACT: The Congressional Research Service states that, Education savings bonds provide
lower- and middle-income families with a tax-favored way to save for higher education that is
convenient and often familiar. The benefits are greater for families who live in states and
localities with high income taxes because the interest income from Series EE and Series I Bonds
is exempt from state and local income taxes.
55

Several restrictions limit the value of education savings bonds as a college savings vehicle. CRS
observes that, Since the interest exclusion for Education Savings Bonds can be limited when the
bonds are redeemed, families intending to use them for college expenses must predict their
income eligibility far in advance. They must also anticipate the future costs of tuition and fees
and whether their children might receive scholarships In these respects, the bonds may not be
as attractive an investment as some other education savings vehicles.
56

55
2010), p. 626.

56
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Income Tax
Exclusions

17. Interest on state and local private-activity bonds issued to finance
education facilities

Internal Revenue Code Sections: 103, 141,142(k), 145, 146, and 501(c)(3)
Total $3,192 $3,294 $3,397 $3,500

DESCRIPTION: Interest income on state and local bonds used to finance the construction of
non-profit educational facilities (such as classrooms and dormitories) and qualified public
educational facilities is tax-exempt. These bonds are classified as private-activity bonds, rather
than governmental bonds, because a substantial portion of the benefits accrues to individuals or
private organizations instead of the general public.

Bonds issued for non-profit educational facilities are not subject to the state volume cap on
private-activity bonds, but there is a cap of $150 million on the amount of bonds any non-profit
institution can have outstanding. Public colleges and universities can also issue tax-exempt bonds
to finance facilities that are owned by private, for-profit corporations, provided that the school has
a public-private agreement with the local education authority. Tax-exempt bonds issued for
qualified public education facilities are subject to a separate state-by-state cap equal to $10 per
capita or $5 million per year, whichever is greater.

PURPOSE: The purpose of the education private-activity bonds is to support the construction or
substantial rehabilitation of educational facilities by subsidizing low-interest loans. Investors
purchase the bonds at low interest rates because the income from them is tax-free.

IMPACT: The tax-exempt bonds benefit educational institutions by helping them finance
facilities at reduced interest rates. According to the Congressional Budget Office and the Joint
Committee on Taxation, education facility bonds accounted for 17 percent of total state and local
private-activity bond issuance from 1991 to 2007, growing 11 percent annually during that
period.
57

The Congressional Research Service observes that non-profit universities may be using their tax-
exempt status to subsidize goods and services for groups that might receive more critical scrutiny
if they were subsidized by direct federal expenditure.
58
Furthermore, As one of many

57
Congressional Budget Office and the Joint Committee on Taxation, Subsidizing Infrastructure
Investment with Tax-Preferred Bonds (Washington, D.C.: Congressional Budget Office and Joint
Committee on Taxation, 2009), pp. 19-23.

58
2012), p. 673.
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Page 49
categories of tax-exempt bonds, nonprofit educational facilities and public education bonds have
increased the financing costs of bonds issued for more traditional public capital stock. In
addition, this class of tax-exempt bonds has increased the supply of assets that individuals and
corporations can use to shelter income from taxation.
59

59
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Income Tax
Exclusions

18. Interest on state and local private-activity student loan bonds

Internal Revenue Code Sections: 103, 141, 144(b), and 146
Year Enacted in Federal Law: 1965 (general exclusion for state and local bonds was
enacted in 1913, but student loan bonds were not offered
until enactment of the Higher Education Act of 1965)
Cl Total
Total $469 $469 $469 $469

DESCRIPTION: Student loan bonds, which are issued by state and local governments to finance
student loans at below-market rates, represent another type of tax-exempt, private-activity bond.
These bonds are subject to a states annual volume cap on private-activity bonds, and therefore
msut compete for tax-exempt financing with all other private-activity bonds that are subject to the
cap. The tax expenditure represents the revenue loss from the exclusion of interest on the bonds.

In addition, this tax expenditure includes the revenue loss from federal government loan programs
(such as Stafford, PLUS, and Consolidation loans) that were carried out through private lenders
and financed in part by tax-exempt debt. As of July 1, 2010, the federal government is providing
loans directly instead of operating through private lenders. Nevertheless, there is an ongoing
revenue loss from loans that have already been issued.

PURPOSE: The purpose of the private-activity bonds is to increase access to higher education by
subsidizing low-interest loans. Investors purchase the bonds at below-market interest rates
because the income from them is tax-free.

IMPACT: Students benefit from the exclusion, which may also generate spillover benefits to
society from a more educated citizenry. The lower interest rate on the bonds may increase the
availability of student loans by lowering the cost of government borrowing, but it does not reduce
the interest rate charged to students, which is set by federal law. Students present a high credit
risk due to their uncertain earning prospects, meaning that the private sector may not supply a
sufficient amount of capital for higher education due to the risk. Subsidies can help correct this
market failure.
60

The Congressional Research Service points out that other federal programs, such as subsidized
direct loans, may be sufficient to address the market failure. Tax-exempt financing also involves
potential costs. CRS states that, As one of many categories of tax-exempt private-activity
bonds, bonds issued for student loans have increased the financing costs of bonds issued for
public capital stock, and have increased the supply of assets available to individuals and
corporations to shelter their income from taxation.
61

60
U.S. Senate, Committee on the Budget, pp. 663-664

61
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Income Tax
Exclusions

19. Scholarship and fellowship income

Total $3,289 $3,411 $3,654 $3,776

DESCRIPTION: Scholarships and fellowships are excluded from personal taxable income to the
extent that they cover tuition and course-related expenses of students enrolled in primary,
secondary, or higher education. The exclusion covers awards based on financial need (such as
Pell Grants) as well as those based on academic achievement or merit (such as National Merit
Scholarships). Eligible educational institutions must maintain a regular teaching staff and
curriculum, and have a regularly enrolled student body attending classes where the school carries
out its instructional activities.

PURPOSE: This exclusion was originally enacted to clarify the status of education grants. Until
this provision was enacted in 1954, scholarships and fellowships were included in gross income
unless it could be proven that the money was a gift. The Congressional Research Service
observes that the present rationale for the exclusion, in light of the expansion of need-based
grants, rests upon the hardship that taxation would impose. If the exclusion were abolished,
awards could arguably be increased to cover students additional tax liability, but the likely effect
would be that fewer students would get assistance.
62

IMPACT: CRS states that, The exclusion reduces the net cost of education for students who
receive financial aid in the form of scholarships or fellowships. The potential benefit is greatest
for students at schools where higher tuition charges increase the amount of scholarship or
fellowship assistance that might be excluded.
63
As a result, students attending private colleges
and universities may claim a disproportionate share of the benefits.

CRS adds that, The exclusion provides greater benefits to taxpayers with higher marginal tax
rates. While students themselves generally have low (or even zero) marginal rates, they often are
members of families subject to higher rates. Determining what ought to be the proper taxpaying
unit for college students complicates assessment of the exclusion.
64

62

63

64
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Income Tax
Exclusions

20. Cafeteria plan benefits

Total $32,715 $34,950 $36,737 $38,704

DESCRIPTION: Cafeteria plans are employer-sponsored benefit packages that offer employees
a choice between cash and qualified benefits, such as accident and health coverage, group-term
life insurance, dependent care assistance, and adoption assistance. The employee pays no tax on
the value of the benefits but pays tax if he or she chooses cash instead.

Most flexible spending accounts (FSAs), which reimburse employees for specific expenses up to
a maximum amount, are governed by cafeteria plan rules because they involve a choice between
cash wages and non-taxable benefits. FSAs allow employees to make pre-tax contributions for
reimbursement of health and/or dependent care expenses, but these accounts have a use or lose
rule. Starting in 2013, contributions to health care FSAs are capped at $2,500.

In 2012, 20 percent of employees had access to a flexible benefits plan, 37 percent had access to a
dependent care plan, and 40 percent had access to a health care reimbursement plan. Employees
of firms with more than 500 employees were more likely to have access to these plans.
65

PURPOSE: The purpose of the exclusion is to promote the adoption and use of flexible benefit
packages that allow employees to choose the benefits they most need.

IMPACT: The Congressional Research Service points out that, As with other tax exclusions, the
tax benefits are greater for taxpayers with higher incomes. Higher income taxpayers may be
more likely to choose nontaxable benefits (particularly health care benefits) instead of cash,
which would be taxable. Lower income taxpayers may be more likely to choose cash, which they
may value more highly and for which the tax rates would be comparatively low.
66

CRS further states that, Ability to fine-tune benefits increases the efficient use of resources and
may help some employees better balance competing demands of family and work.
67
Still, the
exclusion may impair horizontal equity because, (T)he favored tax treatment of cafeteria plans
leads to different tax burdens for individuals with the same economic income.
68

65

66

67

68
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Income Tax
Exclusions

21. Employee awards

Internal Revenue Code Sections: 74(c) and 274(j)
n Personal Total
Total $268 $268 $268 $268

DESCRIPTION: Certain awards of tangible personal property given to employees for length of
service or for safety practices are excluded from personal taxable income, departing from the
standard treatment of prizes and awards as taxable income. The amount of the exclusion is
limited to $400 per employee but can rise to $1,600 if it is part of a qualified employee
achievement award plan that does not discriminate in favor of highly compensated employees.
The employer is also allowed to deduct the cost from its taxable income. If the cost of the award
to the employer and the fair market value of the award exceed the limits stated above, the
employee must include the extra amount in his or her gross income.

There are several other restrictions designed to ensure that the awards do not constitute disguised
compensation. Length of service awards cannot be granted to an employee in the first five years
of service, or to an employee who received a length of service award in any of the prior four years
of service. Awards for safety achievement cannot be awarded to a manager, administrator,
clerical employee, or other professional employee. In addition, safety awards cannot be granted
to more than 10 percent of employees in any year.

PURPOSE: The purpose of the exclusion is to clarify the tax treatment of employee awards and
to encourage longevity in employment as well as safety practices on the job.

IMPACT: Employees who receive length-of-service or safety awards and employers who save
costs related to training and time lost to injuries benefit from this provision. The Congressional
Research Service points out that, The exclusion recognizes a traditional business practice which
may have social benefits. The combination on the limitation of the exclusion as to eligibility for
qualifying awards, and the dollar amount of the exclusion not being increased since 1986, keep
the exclusion from becoming a vehicle for significant tax avoidance. However, the lack of an
increase in the exclusion effectively reduces the tax-free portion of some awards.
69

69

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Income Tax
Exclusions

22. Employee stock ownership plans

Internal Revenue Code Sections: 401(a)(28), 404(a)(9), 404(k), 415(c)(6), 1042,
4975(e)(7), 4978, and 4979A
Total $668 $668 $816 $816

DESCRIPTION: An employee stock ownership plan (ESOP) is a defined-contribution retirement
plan that invests in the stock of a sponsoring employer. ESOPs involve several tax expenditures.

First, employer contributions may be deducted from corporate taxable income as a business
expense. An employer may also deduct dividends paid on stock held by an ESOP if the dividends
are paid to plan participants. Second, employees are not taxed on employer contributions or the
earnings on invested funds until they are distributed. Third, a stockholder in a closely-held
company may defer recognition of the gain from the sale of stock to an ESOP if, after the sale,
the ESOP owns at least 30 percent of the companys stock and the seller reinvests the proceeds
from the sale of stock in a U.S. company.

PURPOSE: The Congressional Research Service states that, The tax incentives for ESOPs are
intended to broaden stock ownership, provide employees with a source of retirement income, and
grant employers a tax-favored means of financing.
70

IMPACT: Employers and employees of participating companies benefit from the tax-favored
status of ESOPs. Although most ESOPs are sponsored by private companies, the majority of
ESOP participants are employed by public companies with 100 or more participants.
71

CRS observes that, These plans are believed to motivate employees by more closely aligning
their financial interests with the financial interests of their employers. The distribution of stock
ownership in ESOP firms is broader than the distribution of stock ownership in the general
population.
72
Nevertheless, (T)he requirement that ESOPs invest primarily in the stock of the
sponsoring employer is consistent with the goal of corporate financing, but it may not be
consistent with the goal of providing employees with retirement income. The cost of such a lack
of diversification was demonstrated with the failure of Enron and other firms whose employees
retirement plans were heavily invested in company stock.
73

70

71

72
.
73
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Income Tax
Exclusions

23. Employer-paid meals and lodging (other than military)

Internal Revenue Code Sections: 119 and 132(e)(2)
otal
Total $1,698 $1,877 $2,056 $2,235

DESCRIPTION: Employees can exclude from personal taxable income the fair market value of
meals provided by employers if the meals are furnished on the employers business premises and
for the convenience of the employer. The fair market value of lodging provided by an employer
can also be excluded from personal taxable income, if the lodging is furnished on business
premises for the convenience of the employer, and if the employee is required to accept the
lodging as a condition of employment (as when an apartment manager must live on the premises).
The exclusion does not apply to cases in which an employee is reimbursed by the employer for
amounts spent on meals and lodging.

In addition, the fair market value of meals provided to an employee at a subsidized eating facility
operated by the employer is excluded from taxable income.

PURPOSE: The purpose of the exclusion is to eliminate a record-keeping burden and to
recognize that the fair market value of employer-provided meals and lodging may be difficult to
measure.

IMPACT: The Congressional Research Service states that, The exclusion subsidizes
employment in those occupations or sectors in which the provision of meals and/or lodging is
common. Both the employees and their employers benefit from the tax exclusion. Under normal
market circumstances, more people are employed in these positions than would otherwise be the
case and they receive higher compensation (after tax). Their employers receive their services at
lower cost. Both sides of the transaction benefit because the loss is imposed on the U.S. Treasury
in the form of lower tax collections.
74

74
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Income Tax
Exclusions

24. Housing allowance for ministers

Internal Revenue Code Section: 107 and 265
Total $626 $715 $715 $715

DESCRIPTION: Ministers can exclude from personal taxable income the fair rental value of a
church-owned or church-rented home furnished as part of their compensation, or a cash housing
allowance paid as part of their compensation. The church must officially designate the allowance
as being for housing before paying it to the minister, and the allowance cannot exceed the fair
rental value of the ministers home. In addition, ministers who receive cash housing allowances
may also claim them as tax deductions on their individual income tax returns if they are used to
pay mortgage interest and real estate taxes on their residences.

PURPOSE: The Revenue Act of 1921 authorized only the exclusion for church-provided
housing. Although there was no stated rationale for the exclusion, the Congressional Research
Service notes that, Congress may have intended to recognize clergy as an economically deprived
group due to their relatively low incomes.
75
Congress added the exclusion for cash housing
allowances in 1954, possibly to provide equal treatment among clergy members receiving
different types of housing assistance from their churches. In clarifying the tax treatment of
housing assistance to clergy members in the Clergy Housing Allowance Clarification Act of
2002 (P.L. 107-181), Congress stated its desire to minimize government intrusion into internal
church operations and the relationship between a church and its clergy.

IMPACT: Ministers who receive a housing allowance or who live in a church-provided home
benefit from this provision. CRS observes that, The tax-free parsonage allowances encourage
some congregations to structure maximum amounts of tax-free housing allowances into their
ministers pay and may thereby distort the compensation package. The provision is inconsistent
with economic principles of horizontal and vertical equity. Since all taxpayers may not exclude
amounts they pay for housing from taxable income, the provision violates horizontal equity
principles Ministers with higher incomes receive a greater subsidy than lower-income
ministers because those with higher incomes pay taxes at higher marginal tax rates. The
disproportionate benefit of the tax exclusion to individuals with higher incomes reduces the
progressivity of the tax system, which is viewed as a reduction in equity.
76
In addition, some
ministers are able to claim the tax benefits twice by deducting mortgage interest payments that
were made with cash housing allowances that are excluded from taxable income.

75

76
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Income Tax
Exclusions

25. Miscellaneous fringe benefits

Internal Revenue Code Sections: 117(d) and 132
Total $6,704 $6,883 $7,061 $7,330

DESCRIPTION: Certain non-cash fringe benefits qualify for an exclusion from an employees
gross income. These benefits include services provided at no additional cost (such as free stand-
by flights for airline employees), employee discounts, working condition fringe benefits, certain
tuition reductions, and de minimis fringe benefits (such as providing coffee to employees or
allowing them occasional personal use of an office copy machine).

The benefits must be provided solely to employees, their spouses, and dependent children; retired
employees; or the widows or widowers of former employees.

PURPOSE: The Congressional Research Service states that, Congress recognized that in many
industries employees receive either free or discount goods and services that the employer sells to
the general public. In many cases, these practices had been long established and generally had
been treated by employers, employees, and the Internal Revenue Service as not giving rise to
taxable income.
77
CRS further points out that, Employees clearly receive a benefit from the
availability of free or discounted goods or services, but the benefit may not be as great as the full
amount of the discount. Employers may have valid business reasons, other than simply providing
compensation, for encouraging employees to use the products they sell to the public As with
other fringe benefits, placing a value on the benefit in these cases is difficult.
78

IMPACT: Both employers and employees benefit from this exclusion, which subsidizes
employment in those businesses and industries in which ancillary fringe benefits are feasible and
commonly offered. CRS states that, Under normal market circumstances, more people are
employed in these businesses and industries than they would otherwise be, and they receive
higher compensation (after tax). Their employers receive their services at lower cost. Both sides
of the transaction benefit because the loss is imposed on the U.S. Treasury in the form of lower
tax collections.
79
In addition, Because the exclusion applies to practices which are common
and may be feasible only in some businesses and industries, it creates inequities in tax treatment
among different employees and employers.
80

77

78

79

80
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Income Tax
Exclusions

26. Spread on acquisition of stock under incentive stock option plans
and employee stock purchase plans

Corporate Income Tax Loss -$984 -$1,042 -$1,042 -$1,042
Total -$719 -$668 _-$668 -$668

DESCRIPTION: Employees may be granted stock options under an incentive stock option plan
(which is capped at $100,000 annually per employee, and can be confined to officers or highly-
paid employees) or an employee stock purchase plan (which is capped at $25,000 annually per
employee, and must be offered to all full-time employees with at least two years of service).
These plans allow employees to exercise the stock options within a specified time frame.

Generally, a stock option or purchase plan allows an employee to buy the stock for less than the
current market price. At the time the employee exercises an option, the stock is transferred from
the company to the employee, but the difference in value between the market value and the option
prices (also known as the spread) is not considered taxable income. The value of this tax
expenditure stems from the deferral of the tax until the employee sells the stock. If the stock is
held one year from purchase and two years from the granting of the option, the gain is also taxed
at the lower long-term capital gain rate.

The employer is not allowed a tax deduction for granting a stock option, but if the stock is not
held for the required amount of time the employee is taxed at ordinary income tax rates (rather
than lower capital gain rates) and the employer is allowed a deduction.

PURPOSE: According to the Congressional Research Service, the deferral of tax for qualified
stock options was re-instituted by the Economic Recovery Tax Act of 1981 with the justification
that encouraging the management of a business to have a proprietary interest in its successful
operation would provide an important incentive to expand and improve the profit position of the
companies involved.
81
The deferral of taxable gains had been allowed between 1964 and 1976.

IMPACT: CRS describes the complex effects of this provision as follows: Taxpayers with
above average or high incomes are the primary beneficiaries of these tax advantages. Because
employers (usually corporations) cannot deduct the cost of stock options eligible for the lower tax
rate on long-term capital gains, employers pay higher income taxes. The prevailing view of tax
economists is that the corporate income tax falls primarily on shareholders. Because most
corporate stock is owned by high income households, these households bear the incidence of this

81

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aspect of stock options. These conflicting effects on incidence mean that the overall incidence of
qualified stock options is uncertain.
82

CRS also observes that, Paying for the services of employees, officers, and directors by the use
of stock options has several advantages for the companies. Start-up companies often use this
method because it does not involve the immediate cash outlays that paying salaries involves; in
effect a stock option is a promise of a future payment, contingent on increases in the value of the
companys stock. It also makes the employees pay dependent on the performance of the
companys stock, giving them extra incentive to try to improve the companys (or at least the
stocks) performance.
83

82

83

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Income Tax
Exclusions

27. Voluntary employees beneficiary association income

Internal Revenue Code Sections: 419, 419A, 501(a), 501(c)(9) and 4976
Total $2,592 $2,771 $2,860 $2,860

DESCRIPTION: A voluntary employees beneficiary association (VEBA) provides life,
sickness, accident, and other insurance, as well as fringe benefits, to its employee members, their
dependents, and their beneficiaries. The income earned by a VEBA is generally exempt from
federal income taxes,
84
but when the benefits are distributed to individuals, the income is taxable
unless there is a specific statutory exclusion. Accident and health benefits are excludable from
income, but severance and vacation pay are not.

Most VEBAs are organized as trusts to be legally separate from their employers. VEBAs must
meet a number of general requirements. Most importantly, they must be associations of
employees who share a common employment-related bond, such as membership in a collective
bargaining unit. In addition, membership in a VEBA must be voluntary and the association must
be controlled by its members, by an independent trustee such as a bank, or by trustees or
fiduciaries at least some of whom are designated by the members or on behalf of the members.
Substantially all of the organizations operations must further the provision of life, sickness,
accident, and other welfare benefits to employees and their families, and benefit plans (other than
collectively-bargained plans) must not discriminate in favor of highly-compensated individuals.

PURPOSE: The Congressional Research Service states that, Perhaps VEBAs were seen as
providing welfare benefits that served a public interest and normally were exempt from
taxation.
85

IMPACT: CRS points out that, A VEBA may provide a valuable option for both employers and
employees by providing tax-free contributions for employers and benefits to employees. In
addition, the irrevocable trust fund associated with a VEBA helps protect the benefits
86
In
the case of bankruptcy, the presence of a VEBA with accumulated assets for payment of retiree
health benefits offers retirees a measure of protection.

84
Income earned by a VEBA to pre-fund retiree health benefits is normally subject to tax, but an important
exception applies to VEBAs that are established through collective bargaining.

85

86
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Income Tax
Exclusions

28. Interest on state and local private-activity bonds issued to support
energy facilities

Internal Revenue Code Sections: 103, 141, 142(f), and 146
C Total
Total $27 $27 $27 $37

DESCRIPTION: Each state receives a certain amount of authority to issue tax-exempt private
activity bonds, which are securities issued by a state or local government to finance qualified
projects by a private user. Qualified projects, which include energy production facilities such as
electric energy or gas, are expected to have a public benefit.

Energy facility bonds are subject to the annual volume cap for state private activity bonds and
generally, only facilities operating as of January 1, 1997, are eligible for tax-exempt financing.

PURPOSE: The purpose of the bonds is to reduce the operating cost of electricity-generating
facilities for a limited number of entities. Without the tax preference, local electricity generation
might not have been viable economically. Investors purchase the bonds at low interest rates

IMPACT: Energy production companies as well as residential and commercial users of energy
benefit from this provision. The Congressional Budget Office and the Joint Committee on
Taxation estimate that energy facilities accounted for only 2 percent of total state and local
private-activity bond issuance from 1991 to 2007.
87

The Congressional Research Service states that, Even if a case can be made for a federal subsidy
of energy production facilities based on underinvestment at the state and local level, it is
important to recognize the potential costs. As one of many categories of tax-exempt private-
activity bonds, those issued for energy production facilities increase the financing cost of bonds
issued for other public capital. With a greater supply of public bonds, the interest rate on the
bonds necessarily increases to lure investors. In addition, expanding the availability of tax-
exempt bonds increases the range of assets available to individuals and corporations to shelter
their income from taxation.
88

87
Congressional Budget Office and Joint Committee on Taxation, p. 19.

88
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Income Tax
Exclusions

29. Accrued interest on savings bonds

Internal Revenue Code Sections: 454(c)
Federal Law Sunset Date: None for general deduction
Total
Personal Income Tax Loss $980 $980 $980 $1,050
Total $980 $980 $980 $1,050

DESCRIPTION: Owners of U.S. Treasury Series E, EE, and I savings bonds have the option to
include the interest in their taxable income as it accrues, or to defer taxation on the interest until
the bond is redeemed. The estimated revenue loss from this tax expenditure represents the
difference between the tax that would be due on the interest upon accrual and the tax that is paid
using the deferral option.

PURPOSE: The exclusion of accrued interest is intended to encourage people to buy U.S.
savings bonds. The Congressional Research Service points out that, The deferral of tax on
interest income on savings bonds provides two advantages. First, the payment of tax on the
interest is deferred, delivering the equivalent of an interest-free loan of the amount of the tax.
Second, the taxpayer often is in a lower income bracket when the bonds are redeemed. This is
particularly common when the bonds are purchased while the owner is working and redeemed
after the owner retires.
89

IMPACT: Savings bonds appeal to small savers because the bonds are available in small
denominations, are easy to purchase, and serve as a safe investment. In addition, higher-income
individuals cannot devote much of their savings to the bonds because of annual purchase limits.
90

CRS states that, Because poor families save little and do not pay federal income taxes, the tax
deferral of interest on savings bonds primarily benefits middle income taxpayers.
91

CRS adds that, The savings bond program was established to provide small savers with a
convenient and safe debt instrument and to lower the cost of borrowing to the taxpayer. The
option to defer taxes on interest increases sales of bonds. But there is no empirical study that has
determined whether or not the cost savings from increased bond sales more than offset the loss in
tax revenue from the accrual.
92

89

90
Annual cash purchases of both EE and I bonds are limited to $5,000 per-person for each type of bond
(for a total of $10,000 per year).

91

92
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Income Tax
Exclusions

30. Allocation of interest expenses attributable to tax-exempt bond
interest by financial institutions

Internal Revenue Code Sections: 141, 265(a), 265(b), and 291(e)
Federal Law Sunset Date: None (but only applies to bonds issued in 2009 and
2010)
Total
Total $290 $347 $347 $405

DESCRIPTION: Banks and other financial institutions are allowed to deduct their interest
payments to depositors as a cost of doing business, thereby reducing their tax liability.
Nevertheless, banks have to reduce their interest deduction if they invest in tax-exempt bonds.
Generally, banks and financial institutions must reduce their interest deduction by the same
percentage that tax-exempt bonds make up of total assets (i.e., if tax-exempt bonds are 10 percent
of the banks portfolio, then the interest deduction must be reduced by 10 percent). The reason
for this rule is to prevent banks from claiming two tax preferences for the same investment.

There are two important qualifications to this general rule. First, individuals and non-financial
institutions with tax-exempt bond investments that comprise less than 2 percent of their
investment portfolio are not required to reduce their interest expense deduction. Second, banks
are required to reduce their interest deduction for investments in tax-exempt bonds by only 20
percent if the bonds are offered by small issuers and are not private-activity bonds.

This tax expenditure captures the revenue loss from two temporary expansions of the interest
deduction offset rules allowed for the purchase of bonds issued in 2009 and 2010. First, banks
and other financial institutions were allowed to shelter an amount equal to 2 percent of the bonds
issued during those years from the offset to their interest deduction. Second, the definition of
small issuer was changed to include municipalities issuing up to $30 million in bonds per year,
rather than $10 million.

PURPOSE: According to the Congressional Research Service, the rationale for the expanded
interest deduction for banks and financial institutions investing in tax-exempt bond is to
encourage public investment infrastructure generally and to assist state and local governments
issue debt.
93

IMPACT: CRS states that, The temporary elimination of the requirement that banks and
financial institutions reduce their interest expense deduction for tax-exempt bond holdings will
likely increase demand for these bonds and confer some interest cost savings to issuers. The
magnitude of the interest cost saving is unclear and the effectiveness of the provision is uncertain.

93

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The increased complexity of the tax code, however, would likely reduce the effectiveness and
economic efficiency of the provision.
94

94
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Income Tax
Exclusions

31. Interest on public-purpose state and local bonds

Internal Revenue Code Sections: 103, 141, and 146
Total
Corporate Income Tax Loss $5,501 $5,616 $5,732 $5,848
Total $33,543 $35,198 $36,136 $37,074

DESCRIPTION: The interest on state or local bonds that are used to build capital facilities that
are owned and operated by government entities and serve the general public interest (such as
schools, highways, and bridges) are excluded from federal taxable income.

D.C. policymakers had eliminated the exclusion of interest on out-of state bonds acquired after
December 31, 2012, from the District of Columbia personal income tax. This action meant that
the District had decoupled from the federal exclusion for state and local bond interest, except
for bonds issued by the District. Nevertheless, policymakers reversed this decision as part of
D.C. Act 20-157, the Fiscal Year 2014 Budget Support Act of 2013, and all interest on public-
purpose state and local bonds will continue to be excluded from D.C. taxes.

PURPOSE: According to the Congressional Research Service, the exclusion was based on the
belief that state and local interest income was constitutionally protected from federal taxation. In
1988, the U.S. Supreme Court ruled in South Carolina v. Baker that federal taxation of state and
local interest income was not barred by the Constitution, but the exclusion has remained in place.
CRS states that, (M)any believe the exemption for governmental bonds is still justified on
economic grounds, principally as a means of encouraging state and local governments to
overcome a tendency to underinvest in public capital formation.
95

IMPACT: State and local governments benefit from the exclusion because it allows them to offer
lower interest rates by increasing the effective rate of return enjoyed by the bondholder. In effect,
the federal government subsidizes a state or local governments interest cost by providing the
exclusion.

Purchasers of state and local bonds also benefit from the exclusion, but the distribution of benefits
depends on the interest-rate spread between taxable bonds and the tax-exempt municipal bonds,
the percentage of the tax-exempt bond issues purchased by individuals of different income levels,
and the range of marginal tax rates. Higher-income taxpayers are more likely to benefit because
they are more likely to own bonds and can gain a windfall from the interest-rate spread due to
their higher marginal tax rates. Nevertheless, researchers at the Tax Policy Center have pointed
out that low- and moderate-income individuals may gain a significant benefit if the state and local

95
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programs supported by municipal bonds (such as school construction) provide roughly equal
benefits on a per-capita basis.
96

The windfall for higher-income taxpayers is illustrated by the following example. Assume that
taxable bonds are paying 7 percent interest and that tax-exempt municipal bonds are paying 5
percent. For someone facing a 25 percent marginal tax rate, the effective return on the taxable
bond will be 5.25 percent (7 percent minus the .25 tax), a better deal than the tax-exempt rate of 5
percent. For someone facing a 40 percent marginal tax rate, the effective rate on the taxable bond
will be 4.2 percent (7 percent minus the .40 tax), making the tax-exempt bonds 5 percent return a
better deal. In fact, the 5 percent interest rate exceeds the amount that the higher-income taxpayer
would demand (4.2 percent) to buy a tax-exempt bond rather than a taxable bond. Internal
Revenue Service data from 2009 show that 66.9 percent of tax-exempt interest income was
earned by tax filers with adjusted gross income of more than $100,000.
97

The windfall for higher-income taxpayers also means that tax-exempt bonds are inefficient: the
government loses more revenue by subsidizing tax-exempt bonds than it would cost to provide
direct grants to subsidize the same amount of borrowing by state and local governments.
According to the Congressional Budget Office and the Joint Committee on Taxation, research
suggests that only 80 percent of the tax expenditure from tax-exempt bonds actually translates
into lower borrowing costs for state and local governments; the other 20 percent represents a
deadweight loss.
98

The federal subsidy of state and local borrowing for capital investment may generate spillover
benefits for nearby states or localities; for example, a modernized wastewater treatment plant may
reduce pollution in nearby rivers and lakes. At the same time, some question the subsidy for
promoting capital investment at the expense of labor and argue that there is no evidence that any
underproduction or underconsumption of public services in the state and local sector is limited to
capital. Finally, the subsidizing of state and local bonds decreases federal control of the budget
because the revenue loss results from the decisions of state and local officials.
99

96
Harvey Galper, Joseph Rosenberg, Kim Rueben, and Eric Toder, Who Benefits from Tax-Exempt
Bonds?: An Application of the Theory of Tax Incidence, working paper of the Tax Policy Center,
September 27, 2013, pp. 14-18.

97

98
Congressional Budget Office and the Joint Committee on Taxation, p. 34.

99
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Income Tax
Exclusions

32. Employer contributions for medical care, medical insurance
premiums, and long-term care insurance premiums

Internal Revenue Code Sections: 105, 106, and 125
l Total
Total $127,821 $136,579 $144,357 $153,027

DESCRIPTION: Employer payments for health insurance, other employee medical expenses,
and long-term care insurance are not included in an employees personal taxable income. The
exclusion applies to health benefits provided to the employees family members.

The exclusion also applies to flexible spending accounts (FSAs), which allow employees to
choose a benefit amount at the start of a year and to use the account to pay for medical expenses
not covered by employer-provided health insurance. FSAs are funded through wage and salary
reductions, or through employer contributions, both of which are exempt from federal income tax.

Although eliminating or capping the exclusion was discussed during the debate over the Patient
Protection and Affordable Care Act of 2010 (P.L. 111-147), policymakers decided instead to
impose an excise tax of 40 percent on high-cost health insurance plans.

PURPOSE: The exclusion of employer-provided health insurance from taxable income is part of
a longstanding policy of excluding fringe benefits from taxation. The exclusion subsidizes the
provision of health care to employees through employer-provided group health insurance.

IMPACT: The Congressional Research Service states that, The tax exclusion for employer
contributions to employee health plans benefits only those taxpayers who participate in employer-
sponsored plans. Beneficiaries include current employees as well as retirees.
100
In 2011, 58.4
percent of the U.S. population received health insurance coverage through employers, according
to the Employee Benefits Research Institute.
101
CRS adds that, Although the tax exclusion
benefits a majority of working Americans, it provides greater benefits to higher-income taxpayers
than to lower-income ones. Highly paid employees tend to receive more generous employer-paid
health insurance coverage than their lowly paid counterparts. And highly paid employees fall in
higher tax brackets that increase the value of the exclusion.
102

Those who are least likely to receive employer-provided health insurance include workers under
age 25, workers in firms with fewer than 25 employees, part-time workers, low-wage workers,

100

101

102
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Page 68
and workers in the construction, business and personal service, entertainment, and wholesale and
retail trade industries.
103

Experts also points out that the health care exclusion imposes significant efficiency costs on
society. The subsidy gives employees an incentive to seek compensation in the form of non-
taxable health benefits rather than in taxable wages. As a result, employees may consume more
health insurance than they need. As stated by CRS, Most health economists think the unlimited
exclusion for employer-provided health insurance has distorted the markets for both health
insurance and health care. Generous health plans encourage subscribers to use health services
that are not cost-effective, putting upward pressure on health care costs.
104

Nevertheless, CRS points out that, The exclusion does have some social benefits. Owing to the
pooling of risk that employment-based group health insurance provides, one can argue that the
exclusion makes it possible for many employees to purchase health insurance plans that simply
would not be available on the same terms or at the same cost in the individual market.
105

103

104

105

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Income Tax
Exclusions

non-profit hospital construction

Internal Revenue Code Sections: 103, 141, 145(b), 145(c), 146, and 501(c)(3).
Cl Total
Total $2,093 $2,299 $2,299 $2,459

non-profit hospitals and nursing homes is tax-exempt. These bonds are classified as private-
activity bonds, rather than governmental bonds, because a substantial portion of the benefits
accrues to individuals or private organizations instead of the general public. Non-profit hospital
bonds are not subject to state volume caps on private-activity bonds. According to the U.S.
Internal Revenue Service, $29.4 billion of qualified hospital bonds were issued in 2010.
106

PURPOSE: The purpose of the bonds is to provide low-cost financing of hospitals and nursing
homes owned by non-profit organizations. Investors purchase the bonds at low interest rates

IMPACT: Private, non-profit hospitals and the communities they serve benefit from this
provision. According to the Congressional Budget Office and the Joint Committee on Taxation,
hospital and other health-care facilities accounted for a majority (53 percent) of state and local
private-activity bond financing from 1991 to 2007.
107
State and local private-activity bonds are
particularly important in the health care sector because the private sector provides almost all
(more than 90 percent) of the total investment in hospitals and other health-care facilities.
108

The Congressional Research Service observes that, Questions have been raised about whether
nonprofit hospitals fulfill their charitable purpose and if they deserve continued access to tax-
exempt bond finance. Even if a case can be made for this federal subsidy for nonprofit
organizations, it is important to recognize the potential costs. As one of many categories of tax-
exempt private-activity bonds, bonds for nonprofit organizations increase the financing cost of
bonds issued for other public capital. With a greater supply of public bonds, the interest rate on
the bonds necessarily increases to lure investors. In addition, expanding the availability of tax-
exempt bonds increases the assets available to individuals and corporations to shelter their
income from taxation.
109

106

107
Congressional Budget Office and Joint Committee on Taxation, p. 19.

108
Congressional Budget Office and Joint Committee on Taxation, pp. 2-3.

109
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Income Tax
Exclusions

34. Medical care and TriCare medical insurance for military
dependents, retirees, retiree dependents, and veterans

Cl Total
Total $2,400 $2,550 $2,600 $2,800

DESCRIPTION: Active-duty military personnel receive a variety of benefits, such as medical
and dental care, that are excluded from taxation. In addition, the following groups are also
eligible for medical and dental care benefits without being subject to taxation: dependents of
active-duty personnel; retired military personnel and their dependents; veterans; survivors of
deceased veterans; and reservists who have served on active duty since September 11, 2001, and
joined the Selected Reserve.

Military dependents and retirees are allowed to receive medical care in military facilities and
from military doctors, if there is sufficient spare capacity. These individuals can also be treated
by civilian health-care providers working under contract with the Department of Defense through
the TriCare program. TriCare provides medical care through a health maintenance organization,
a preferred provider organization, or a fee-for-service option.

PURPOSE: The Congressional Research Service notes that this exclusion has evolved over time
through a series of legislative, administrative, and legal actions. Thus, the rationale has not been
clear-cut. CRS adds that, Even if there was no specific statutory exclusion for the health
benefits received by military personnel and their dependents, a case for excluding them could be
made on the basis of sections 105 and 106 of the Internal Revenue Code. These sections exclude
from the taxable income of employees any employer-provided health benefits they receive.
110

IMPACT: Higher-income individuals gain a disproportionate share of the benefits of the
exclusion because they face higher marginal tax rates that increase the savings from each dollar
excluded. Although the tax exclusion of health benefits may create inefficiencies by encouraging
individuals to purchase more health care than they would if they bore the full cost, direct care
provided in military facilities may be difficult to value for tax purposes. In addition, the
exclusion of medical care for service members dependents and military retirees might hamper
military recruitment and retention.
111

110

111
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Income Tax
Exclusions

35. Medicare Part A hospital insurance benefits

Internal Revenue Code Section: None (Exclusion was authorized by IRS Revenue Ruling
70-341)
Total $15,752 $16,796 $16,995 $18,187

DESCRIPTION: Part A of Medicare pays most of the cost of in-patient hospital care and as
much as 100 days per year of skilled nursing facility care, home health care, and hospice care for
individuals who are 65 or older, or who are disabled. Part A is financed primarily by a payroll
tax on the earnings of current workers, which is split evenly between the employer and the
employee.
112
The expected lifetime value of Part A benefits under current law generally exceeds
the amount of payroll tax contributions by current beneficiaries. This difference, when multiplied
by an individuals marginal tax rate, represents a tax expenditure. The employers share of the
payroll tax is also excluded from an employees taxable income.

PURPOSE: This exclusion has never been established by statute; rather, it was adopted by an
Internal Revenue Service ruling in 1970. The rationale for the ruling was that, (T)he benefits
under Part A of Medicare may be excluded from gross income because they are in the nature of
disbursements intended to achieve the social welfare objectives of the federal government. The
ruling also stated that Medicare Part A benefits had the same legal status as monthly Social
Security payments to an individual,
113
which were not subject to federal income tax at the time.

IMPACT: The Congressional Research Service states that, In effect, the tax subsidy for Part A
benefits lowers the after-tax cost to the elderly for those benefits. As a result, it has the potential
to divert more resources to the delivery of medical care through hospitals than might otherwise be
the case.
114
Nevertheless, CRS adds that, Those who favor curtailing this subsidy, as a means
of increasing federal revenue or reducing use of hospital care, would find it difficult to do so in an
equitable manner for two reasons. First, Medicare benefits receive the same tax treatment as
most other health insurance benefits: they are untaxed. Second, taxing the value of the health
care benefits actually received by an individual would have the largest impact on people who
suffer health problems that are costly to treat: many of these individuals are elderly and living on
relatively small fixed incomes.
115

112
The payroll tax is 2.9 percent on earnings up to $200,000 for single filers and $250,000 for joint filers.
The tax increases to 3.8 percent on earnings above those thresholds.

113

114

115
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Moreover, the dynamics of this tax subsidy will change in the future. The amount by which
Medicare Part A benefits exceed payroll tax contributions will decrease for future retirees
because the contribution period will cover more of their work years (early beneficiaries after
Medicare was established in 1965 contributed for very little of their working lives). In
addition, CRS states, the absence of a cap on worker earnings subject to the Medicare (Part A)
payroll tax means that todays high-wage earners will contribute more during their working years
and consequently receive a smaller (and possibly negative) subsidy once they begin to receive
Medicare Part A benefits.
116

116

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Income Tax
Exclusions

36. Medicare Part B supplementary medical benefits

70-341)
Personal Total
Total $13,467 $14,361 $15,405 $17,044

DESCRIPTION: Part B of Medicare covers certain physician services, outpatient services, and
durable medical equipment for people who are over the age of 65 or who are disabled.
Participation in the program is voluntary, unlike Medicare Part A. Premiums cover 25 percent of
the cost of Medicare Part B for most beneficiaries, but since 2007 upper-income participants pay
a larger share. Regular appropriations cover the rest of the programs costs. The portion of the
programs costs paid by general government revenue is not included in the personal taxable
income of recipients and therefore represents a tax expenditure equal to the marginal tax rate of
enrollees multiplied by the amount of the exclusion.

PURPOSE: The exclusion has never been established by statute; instead, it was authorized by an
Internal Revenue Service ruling in 1970. The IRS determined that Part B benefits (whether
funded by premiums or general appropriations) could be excluded from taxable income because
they have the same status under the tax code as benefits received through other accident and
health insurance.
117
According to the Congressional Research Service, This treatment is
supported by the same rationale used by the IRS to justify the exclusion of Medicare Part A
benefits from the gross income of beneficiaries.
118

IMPACT: CRS states that, While the tax subsidy for Part B reduces the after-tax cost of medical
insurance for retirees, the addition of an income-related premium has partially reduced the tax
subsidy for higher-income beneficiaries. One consequence of a lower after-tax cost of medical
insurance for most beneficiaries is that they may be encouraged to use inefficient amounts of
health care.
119
CRS further points out that, Attempts to recapture the subsidy from lower and
middle income beneficiaries may impose an added tax burden on those who have little flexibility
in their budgets to absorb higher taxes.
120

117

118

119

120
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Income Tax
Exclusions

37. Medicare Part D prescription drug benefits

70-341)
Total $3,578 $3,926 $4,323 $4,770

DESCRIPTION: Part D of the Medicare program subsidizes the cost of prescription drugs for
individuals eligible for Medicare. Participation in Part D is voluntary, except for those who are
eligible both for Medicare and Medicaid, and certain other low-income Medicare beneficiaries
who must enroll. Part D benefits are offered through stand-alone private prescription drug
programs as well as Medicare Advantage plans, such as health maintenance organizations, that
provide all Medicare benefits including prescription drugs. Enrollees pay monthly premiums that
vary by plan and region.

During 2011, premiums provided 25.5 percent of program income; Medicare financed the other
74.5 percent.
121
As in Medicare Part B, premiums increase for higher-income enrollees (this
policy was part of the Patient Protection and Affordable Care Act of 2010). The subsidies
provided by the Medicare program are excluded from the taxable income of enrollees, creating a
tax expenditure equal to the subsidy (the difference between the value of the benefits received
and the premiums that enrollees pay) multiplied by the marginal tax rates faced by enrollees.

PURPOSE: The purpose of the exclusion is to reduce the after-tax cost to enrollees of using
prescription drugs and thereby expand access to such drugs among the elderly. Although the
exclusion of Medicare benefits from taxable income has never been established by statute, it has
been implemented through a regulatory rulings issued by the Internal Revenue Service in 1970.
When Part D was created by the Medicare Prescription Drug, Improvement, and Modernization
Act of 2003 (P.L. 108-173), the same exclusion was therefore applicable.

IMPACT: Senior citizens enrolled in Medicare Part D benefit from the exclusion. In 2011, 73
percent of Medicare recipients were enrolled in a Part D plan, and 90 percent had prescription
drug coverage through Medicare or an employer.
122
The Congressional Research Service notes
that, When premiums were not adjusted by income (prior to 2011), for a given subsidy amount,
the tax savings from the exclusion were greater for enrollees in the highest tax bracket By
income relating premiums, the tax subsidy for higher income beneficiaries is partly reduced.
123

121

122

123

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Income Tax
Exclusions

38. Capital gain on sale of principal residence

Total $35,243 $36,948 $38,511 $39,790

DESCRIPTION: Homeowners may exclude from personal taxable income up to $250,000
(single taxpayers) or $500,000 (married taxpayers filing jointly) of capital gains realized on the
sale of their principal residence. To qualify, the taxpayer must have owned and occupied the
home for at least two of the previous five years. The exclusion applies only to the portion of the
property associated with the residence, not to portions of the property used in business activity.
The exclusion cannot be used more than once every two years.

PURPOSE: Capital gains arising from the sale of an individuals principal residence have long
received preferential tax treatment, in order to promote homeownership by reducing its after-tax
cost. Previously, homeowners were allowed to defer the tax on capital gains from the sale of
their principal residence if the proceeds of the sale were used to buy another home of equal or
greater value. In addition, homeowners aged 55 and older were allowed a one-time exclusion of a
gain up to $125,000 from the sale of their principal residence. In 1997, Congress modified these
provisions to reduce their complexity by allowing all taxpayers to exclude $250,000 (single) or
$500,000 (married filing jointly) of capital gains from the sale of their principal residence.

IMPACT: The Congressional Research Service states that, Excluding the capital gains on the
sale of principal residences from tax primarily benefits middle- and upper-income taxpayers. At
the same time, however, this provision avoids putting an additional tax burden on taxpayers,
regardless of their income levels, who have to sell their homes because of changes in family
status, employment, or health. It also provides tax benefits to elderly taxpayers who sell their
homes and move to less expensive housing during their retirement years. In addition, This
provision simplifies income tax administration and record keeping.
124

With regard to the efficiency impact, CRS states that the exclusion gives homeownership a
competitive advantage over other types of investments, since the capital gains from investments
in other assets are generally taxed when the assets are sold. Moreover, when combined with other
provisions in the tax code such as the deductibility of home mortgage interest, homeownership is
an especially attractive investment. As a result, savings are diverted out of other forms of
investment and into housing.
125

124

125
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Income Tax
Exclusions

39. Income from discharge of principal residence acquisition
indebtedness

Federal Law Sunset Date: December 31, 2012
CTotal
Corporate Income Tax Loss $0 sunset sunset sunset
Personal Income Tax Loss $287 sunset sunset sunset
Total $287 sunset sunset sunset

DESCRIPTION: Mortgage debt cancellation occurs when lenders (1) restructure loans, thereby
reducing principal balances, or (2) sell properties, either in advance or as a result of foreclosure
proceedings. Historically, if a lender forgives or cancels such debt, tax law has treated the
canceled debt as taxable income.

An exception to this rule permits the exclusion of discharged qualified residential debt from gross
income. Qualified indebtedness is defined as debt, limited to $2 million ($1 million if married
filing separately), incurred in acquiring, constructing, or substantially improving the taxpayers
principal residence. The taxpayer is required to reduce the basis in the principal residence by the
amount of the excluded income. The exclusion is not permitted if the discharge was due to
services performed for the lender or any other factor not directly related to a decline in the
residences value or to the taxpayers financial condition.

This provision was originally scheduled to expire on January 1, 2011, but it has been extended
twice and expired on January 1, 2014.

PURPOSE: The purpose of the exclusion is to minimize hardship for households in distress.
Policymakers have expressed concern that individuals who are experiencing hardship and are in
danger of losing their home, presumably as a result of financial distress, should not incur an
additional hardship by being taxed on canceled debt income.

IMPACT: Taxpayers who have had debt canceled benefit from this provision. The
Congressional Research Service notes that, The benefits will be concentrated among middle-
and higher-income taxpayers, as these households have likely incurred the largest residential debt
and are subject to higher marginal tax rates. To a lesser extent, the benefits also extend to lower-
income new homeowners who are in distress as a result of interest rate resets and the slowdown
in general economic activity. The residential debt of lower-income households, however, is
relatively small, thus limiting the overall benefit accruing to these taxpayers.
126

Another concern about the provision is that it could encourage homeowners to be less responsible
about meeting their debt obligations.

126
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Income Tax
Exclusions

housing

Internal Revenue Code Sections: 103, 141, 142, 143, and 146

CTotal
Total $1,990 $2,196 $2,196 $2,196

owner-occupied housing (mortgage revenue bonds, or MRBs), rental housing, and veterans
housing for low and moderate-income families is tax-exempt. These bonds are classified as
private-activity bonds, rather than governmental bonds, because a substantial portion of the
benefits accrues to individuals or private organizations instead of the general public. Housing
construction bonds are subject to state volume caps on private-activity bonds and therefore must
compete with other authorized private activities for bond financing.

PURPOSE: The purpose of the bonds is to finance low-interest mortgages for low- and
moderate-income homebuyers, as well as multi-family housing for low-income renters. Investors
purchase the housing bonds at low interest rates because the income is tax-free. The interest
savings should allow issuers to offer housing for sale or rent at a lower cost.

IMPACT: With regard to homeownership, the Congressional Research Service notes that,
Income, tenure status, and house-price-targeting provisions imposed on MRBs make them more
likely to achieve the goal of increased homeownership than many other housing tax subsidies that
make no targeting effort, such as is the case for the mortgage-interest deduction. Nonetheless, it
has been suggested that most of the mortgage revenue bond subsidy goes to families that would
have been homeowners even if the subsidy were not available.
127
Regarding rental housing,
CRS states that the bonds promote equitable treatment for families unable to take advantage of
the substantial tax incentives available to those able to invest in owner-occupied housing.
128

More generally, private-activity bonds impose costs because they increase the financing cost of
bonds issued for other public capital. With a greater supply of public bonds, the interest rate on
the bonds necessarily increases to lure investors. In addition, expanding the availability of tax-
exempt bonds increases the assets available to individuals and corporations to shelter their
income from taxation.
129

127

128

129
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Income Tax
Exclusions

41. Compensatory damages for physical injury or sickness

Internal Revenue Code Section: 104(a)(2) - 104(a)(5)
Total $1,430 $1,520 $1,520 $1,520

DESCRIPTION: Damages paid through a court award or a settlement to compensate for physical
injury or illness are excluded from the recipients taxable income. The exclusion applies both to
lump-sum payments and periodic payments, but does not apply to punitive damages except in
certain states where only punitive damage awards are allowed. In addition, the exclusion does
not apply to compensation for discrimination or emotional distress.

PURPOSE: According to the Congressional Research Service, the exclusion is based on the
reasoning that these payments are compensating for a loss.
130
Noting that the interest component
of periodic payments would normally be taxable, CRS adds that, An argument for the full
exclusion of periodic payments was to avoid circumstances where individuals used up their lump-
sum payments and might then require public assistance.
131

IMPACT: CRS states that, The exclusion benefits individuals who receive cash compensation
for injuries and illness. It parallels the treatment of workers compensation which covers on-the-
job injuries. It especially benefits higher-income individuals whose payments would typically be
larger, reflecting larger lifetime earnings, and subject to higher tax rates. By restricting tax
benefits to compensatory rather than punitive damages, the provision encourages plaintiffs to
settle out of court so that the damages can be characterized as compensatory.
132

130

131

132
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Income Tax
Exclusions

42. Disaster mitigation payments


DESCRIPTION: Disaster mitigation payments under the Robert T. Stafford Disaster Relief and
Emergency Insurance Act or the National Flood Insurance Act are excluded from taxable income.
Disaster mitigation grants cover a variety of expenditures such as securing items to reduce
potential damage from earthquakes, putting houses on stilts to reduce flood damage, and securing
roofs and windows from wind damage.

PURPOSE: According to the Congressional Research Service, the Internal Revenue Service
ruled in 2004 that disaster mitigation payments would be taxable, in the absence of a specific
exemption in the law. Previously, individuals had not paid taxes on the payments. Congress
responded by establishing an explicit statutory exclusion. CRS states that, The tax legislation
was in response to that ruling and reflected the general view that individuals and businesses
should not be discouraged from mitigation activities due to tax treatment of these payments.
133

IMPACT: CRS observes that, The tax exemption is most beneficial for higher-income
individuals who have higher marginal tax rates. Even individuals with relatively low incomes
could be subject to tax, however, since the mitigation payments can be large when used for major
construction projects (such as putting houses in flood plains on stilts). These individuals might
not have enough income to pay taxes on these grants and taxation might cause them not to
participate in the program.
134

The fairness and efficiency issues surrounding the exclusion are complex. CRS states that, An
argument can be made that individuals should be responsible for undertaking their own measures
to reduce disaster costs since those expenditures would benefit them Disaster mitigation
expenditures for individuals and businesses can also have benefits that spill over to the
community at large, and an individual would not take these benefits into account when making an
investment decision.
135

133

134

135
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Income Tax
Exclusions

43. Employer contributions for premiums on accident and disability
insurance

otal
Total $3,397 $3,575 $3,665 $3,844

DESCRIPTION: Employer payments for employee accident and disability insurance premiums
are not included in an individuals personal taxable income.

PURPOSE: According to the Congressional Research Service, in 1954 Congress exempted
accident and health benefits from taxation in an attempt to equalize the tax treatment of benefits
through an insurance plan and benefits provided in other ways.
136
This action reversed a 1943
Internal Revenue Service ruling that employer payments to employees due to injury or sickness
were subject to taxation.

IMPACT: CRS points out that due to the exclusion, (T)he employers cost is less than he would
have to pay in wages that are taxable, to confer the same benefit on the employee because the
value of this insurance coverage is not taxed. Employers are thus encouraged to buy such
insurance for employees.
137
Nevertheless, CRS adds that, Since public programs (Social
Security and workmans compensation) provide a minimum level of disability payments, the
justification for providing a subsidy for additional benefits is unclear.
138

The exclusion may impair both horizontal and vertical equity. In arguing for repeal of the
exclusion, President Bushs Advisory Panel on Federal Tax Reform stated that, Employees who
have these employer-provided fringe benefits receive better tax treatment than employees who
pay for these expenses out of pocket. Among workers for whom the benefit is available, more of
the benefits go to high-income taxpayers, even though they are paid for with higher tax rates for
everyone.
139
According to the Bureau of Labor Statistics National Compensation Survey,
higher-wage employees and employees working for large firms are more likely to receive
insurance benefits from their employer.
140

136

137

138

139
The Presidents Advisory Panel on Federal Tax Reform, p. 85.

140
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Income Tax
Exclusions

44. Employer contributions for premiums on group-term life
insurance

Total
Total $2,860 $3,039 $3,218 $3,486

DESCRIPTION: Employer payments for employee life insurance (up to $50,000 in coverage)
and death benefits are not included in an individuals taxable income. In order to qualify for the
exclusion, the insurance plan must meet certain requirements including non-discrimination
provisions intended to ensure that benefits are spread widely and equitably among employees.

PURPOSE: The exclusion was originally authorized, without any limitation on the amount of
coverage, by a legal opinion issued in 1920. The $50,000 limit on the amount that can be
excluded was enacted in 1964, based on the view that it would encourage the purchase of group
life insurance and assist in keeping the family unit intact upon death of the breadwinner.
141

IMPACT: The Congressional Research Service states that, Encouraging individuals to purchase
more life insurance may be justified by concerns that many individuals would fail to buy prudent
amounts of life insurance on their own, which could expose surviving family members to
financial vulnerabilities. Subsidizing life insurance coverage may help provide a minimum
standard of living for surviving dependent individuals.
142
Employers may also benefit from the
exclusion, because it allows them to provide this form of compensation at a lower cost than the
earnings employees would need to buy the same amount of insurance on their own.

Nevertheless, there is uneven access to the benefit, giving rise to horizontal and vertical equity
concerns. CRS observes that, Aside from administrative convenience, the rationale for
providing insurance subsidies to employees, but not to the self-employed or those who are not
employed is not obvious. As with many other fringe benefits, higher-income individuals
probably receive more benefits from this exclusion because they are more likely to receive group
life insurance benefits from their employers. Lower-income individuals, whose surviving
dependents are probably more financially vulnerable, probably benefit less from this
exclusion.
143
President Bushs Advisory Panel on Federal Tax Reform called for repeal of the
exclusion based on similar concerns.
144

141

142

143

144
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Income Tax
Exclusions

45. Employer pension contributions and earnings plans

Internal Revenue Code Sections: 401-407, 410-418e, and 457
CTotal
Total $86,257 $95,731 $108,513 $118,793

DESCRIPTION: Employer contributions to qualified pension, profit-sharing, stock-bonus, and
annuity plans are not included in the employees personal taxable income in the year of
contribution. Earnings on these contributions are also tax-free. Withdrawals are included in
taxable income.

There are two major types of pension plans: (1) defined-benefit plans, which guarantee
employees a certain benefit level on retirement, and (2) defined-contribution plans, which provide
a pension that depends on the employees contributions and the earnings on those contributions.
Employer contributions to both types of plans are excluded from taxable income. The estimated
revenue impact of this tax expenditure is the revenue that the government does not collect on
pension contributions and earnings, offset by the taxes paid on pension withdrawals.

PURPOSE: The purpose of the exclusion is to promote saving for retirement, although the actual
effects are unclear. The Congressional Research Service observes that, Since individuals cannot
directly control their contributions to plans in many cases (defined-benefit plans), or are subject
to a ceiling on contributions, the tax incentives to save may not be very powerful At the same
time, pension plans may force saving and retirement income on employees who otherwise would
have total savings less than their pension-plan savings.
145

IMPACT: CRS states that, The employees who benefit from this provision consist of taxpayers
whose employment is covered by a plan and whose service has been sufficiently continuous for
them to qualify for benefits in a company or union-administered plan.
146
Nevertheless, CRS
points out that the benefits are likely to accrue disproportionately to high-income households
because employees with higher salaries are more likely to receive pension benefits, and the dollar
contributions made on behalf of higher-income employees are larger. In addition, higher-income
taxpayers derive a larger benefit because their marginal tax rate is higher, increasing the value of
the exclusion. Workers are also more likely to be covered by pensions if they work in certain
industries, if they are employed by large firms, or if they are unionized.
147

145

146

147
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Income Tax
Exclusions

46. Income of trusts to finance supplemental unemployment benefits

Internal Revenue Code Section: 501(c)(17)
CTotal
Total $27 $36 $45 $54

DESCRIPTION: The investment income from a supplemental unemployment benefit trust may
be exempt from taxation if it is established by an employer, employees, or both, solely to provide
supplemental unemployment compensation when an involuntary loss of employment arises from
a reduction in force, discontinuation of a plant or operation, temporary layoff, or other similar
circumstance.

The trust must be set forth in a written plan that ensures it does not discriminate in favor of
officers, shareholders, supervisors, or highly compensated employees. Benefits must be
determined according to objective standards.

Supplemental unemployment trusts were first established in the auto industry in 1955. If an
employee leaves a company voluntarily or is discharged for misconduct, he or she is not eligible
for a benefit. The employee has no vested interest in the amounts paid into the fund on his or her
behalf.

PURPOSE: The purpose of the exclusion is to encourage the creation of supplemental
unemployment benefit trusts and to increase income support for laid-off workers.

IMPACT: Employers who sponsor a supplemental unemployment benefit trust and the
employees who participate in the plans benefit from this provision. The exclusion may have a
negative effect on economic efficiency, because the tax-free treatment of investment income
encourages provision of supplemental unemployment benefits when other benefits might be more
valuable in the absence of the tax preference.

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Income Tax
Exclusions

47. Investment income on life insurance and annuity contracts

Internal Revenue Code Sections: 72, 101, 7702, 7702A
l Total
Total $41,353 $42,406 $43,400 $44,595

DESCRIPTION: The investment income on life insurance contracts, commonly known as
inside build-up, is typically not included in personal or corporate taxable income as it accrues,
or when it is received by beneficiaries upon the death of the insured individual. Moreover,
amounts paid as dividends or withdrawn as cash are taxed only when they exceed total premiums
paid for the policy, thus allowing tax-free investment income to pay part of the cost of the
insurance protection. The investment income that accumulates as part of an annuity policy is also
free from taxation, but annuities are taxed on their investment component when paid.

Life insurance policies must follow rules designed to limit the tax-free accumulation of income.
If investment income grows faster than is needed to fund the promised benefits, that income will
be attributed to the owner of the policy and is subject to current taxation.

PURPOSE: The non-taxable status of life insurance inside build-up, the exclusion of death
benefits, and the tax deferral on annuity investment income all date back to the creation of the
federal income tax in 1913. The Congressional Research Service suggests that Congress may
have decided to exclude death benefits because they were believed to be comparable to bequests,
which also were excluded from the tax base.
148
CRS also notes that the other exclusions were,
in part, based on the general tax principle of constructive receipt. Policyholders, in this view, did
not own the interest income because to receive that interest income they would have to give up
the insurance protection or the annuity guarantees.
149

IMPACT: CRS states that, These provisions offer preferential treatment for the purchase of
life insurance coverage and for savings held in life insurance policies and annuity contracts.
Middle-income taxpayers, who make up the bulk of the life insurance market, may reap most of
this provisions benefits. Many higher-income taxpayers, once their life insurance requirements
are satisfied, generally obtain better after-tax yields from tax-exempt state and local obligations or
tax-deferred capital gains.
150

148

149

150

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Page 85
The exclusion may create efficiency costs for society because, This exemption of inside build-up
distorts investors decisions by encouraging them to choose life insurance over competing savings
vehicles such as bank accounts, mutual funds, or bonds. The result could be overinvestment in
life insurance and excessive levels of life insurance protection relative to what would occur if life
insurance products competed on a level playing field with other investment opportunities.
151

Although the exclusion may counteract some families tendency to underinvest in life insurance,
CRS questions whether it induces families to buy prudent levels of life insurance,
152
and
whether other initiatives, such as better financial education, might prove more effective.

President Bushs Advisory Panel on Federal Tax Reform recommended repealing this exclusion
(as well as several other exclusions for fringe benefits) because, The favorable tax treatment of
fringe benefits results in an uneven distribution of the tax burden as workers who receive the
same amount of total compensation pay different amounts of tax depending on the mix of cash
wages and fringe benefits.
153

151

152

153
Presidents Advisory Panel on Federal Tax Reform, p. 85.
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Income Tax
Exclusions

48. Public assistance cash benefits

Internal Revenue Code Section: N.A. (this exclusion was established through a series of
IRS rulings dating back to 1933)
Year Enacted in Federal Law: N.A. (this exclusion was established through a series of
IRS rulings dating back to 1933)
Cl Total
Total $5,212 $5,420 $5,629 $5,733

DESCRIPTION: Public assistance benefits in the form of cash payments or in-kind benefits
(goods or services), whether provided free or partly subsidized, are not included in the personal
taxable income of the recipient. Examples include cash benefits provided by the Temporary
Assistance to Needy Families and the Supplemental Security Income program for the aged, blind,
and disabled, and in-kind benefits provided by Medicaid and the Supplemental Nutrition
Assistance Program (Food Stamps).

Nevertheless, the estimates shown above reflect only the forgone revenue from public assistance
cash benefits because it is difficult to determine the value of in-kind benefits to recipients.

PURPOSE: The exclusion is not specifically authorized by law; instead, the exclusion has been
established by a series of Internal Revenue Service rulings. The Congressional Research Service
states that, Revenue rulings generally exclude government transfer payments from income
because they have been considered to have the nature of gifts in aid of the general welfare.
While no specific rationale has been advanced for this exclusion, the reasoning may be that
Congress did not intend to tax with one hand what it gives with the other.
154

IMPACT: CRS notes that, Exclusion of public assistance cash payments from taxation gives no
benefit to the poorest recipients and has little impact on the incomes of many. This is because
welfare payments are relatively low and many recipients have little if any non-transfer cash
income If family cash welfare payments were made taxable, most recipients would still owe
no tax.
155
Nevertheless, some families with relatively large amounts of cash benefits, as well as
those who worked for part of the year and received cash assistance for part of the year, would pay
tax if public assistance benefits were taxable; these families therefore benefit from the exclusion.

The exclusion violates the principle of horizontal equity because people with identical incomes
will face a different tax liability if they receive different amounts of public assistance cash
benefits. On the other hand, the exclusion promotes the social goal of protecting a minimum
level of income for all individuals.

154

155
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Income Tax
Exclusions

49. Roth IRA earnings and distributions

Internal Revenue Code Sections: 408A
Total $1,993 $2,272 $2,550 $2,874

DESCRIPTION: There are two types of Individual Retirement Accounts (IRAs) that offer tax
benefits: the Roth IRA and the traditional IRA. Contributions to a Roth IRA are taxable, but the
earnings, as well as qualified distributions made more than five years after the establishment of
the IRA, are tax-free. The pattern of benefits for a traditional IRA is the opposite: some
contributions to a traditional IRA are tax-deductible for taxpayers below specified income levels,
and the earnings on contributions are tax-free, but the qualified distributions are taxable.
Participation in IRAs is approximately evenly split between Roth IRAs and traditional IRAs.
156

The estimated revenue loss shown above reflects only the impact of Roth IRAs. The tax
expenditure reflects the value of the untaxed Roth IRA earnings and distributions.

Qualified distributions to a Roth IRA are those made after age 59, upon the death or disability
of the individual, or for first-time homebuyer expenses. An individual may contribute up to
$5,000 to a Roth IRA ($6,000 for an individual above the age of 50) or an amount equal to earned
income, whichever is less, but eligibility is conditioned on income. The allowable contribution
was phased out for single filers with income between $112,000 and $127,000, and for joint filers
with income between $178,000 and $188,000, during tax year 2013.

PURPOSE: The purpose of the exclusion is to provide an incentive for taxpayers to save for
retirement, and in particular to provide a savings incentive for workers who do not have
employer-provided pension plans.

IMPACT: Taxpayers who save for retirement through a Roth IRA benefit from this provision.
The Congressional Research Service notes that, IRAs tend to be less focused on higher-income
levels than some types of capital tax subsidies, in part because they are capped at a dollar amount.
Their benefits do tend, nevertheless, to accrue more heavily to the upper half of the income
distribution. This effect occurs in part because of the low participation rates at lower income
levels. Further, the lower marginal tax rates at lower income levels make the tax benefits less
valuable.
157

156
Urban-Brookings Tax Policy Center, The Tax Policy Briefing Book: A Citizens Guide for the 2008
Election and Beyond, p. II-3-1, available at www.taxpolicycenter.org.

157
U.S. Senate, Committee on the Budget, pp. 975.

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It is not clear whether Roth IRAs and other tax-favored retirement plans actually increase
savings. William Gale and Benjamin Harris of the Urban-Brookings Tax Policy Center point out
that, Savings incentives do not raise private saving to the extent that households finance their
contributions by shifting their existing assets into a tax-favored account, or by shifting current-
period saving that would have occurred even in the absence of the incentive, or by increasing
their debt.
158

158
William Gale and Benjamin Harris, Savings and Retirement: How Does Tax-Favored Retirement
Saving Affect National Saving? in The Tax Policy Briefing Book: A Citizens Guide for the 2008 Election
and Beyond, pp. II-3-13 II-3-14, available at www.taxpolicycenter.org.
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Income Tax
Exclusions

50. Social Security and Railroad Retirement benefits

Total $13,029 $13,559 $14,127 $14,809

DESCRIPTION: A portion of Social Security and Railroad Retirement Board benefits are not
subject to federal income tax. By local law, the District of Columbia has extended the tax
exemption to the full amount of benefits (see tax expenditures #127-#130 in this report). This
description and the estimate of forgone revenue shown above pertain only to the benefits that are
exempt due to the Districts conformity to the federal income tax rules.

The amount of Social Security benefits and Tier 1 Railroad Retirement benefits (which are
equivalent to Social Security benefits) subject to federal taxation depends on the amount of
provisional income above certain thresholds. Provisional income is adjusted gross income plus
one-half of Social Security benefits and otherwise tax-exempt interest income, such as tax-
exempt bonds.

Taxpayers with provisional income under $25,000 (single) or $32,000 (married filing jointly) pay
no tax on their Social Security or Railroad Retirement benefits.

If provisional income is above the tax-exempt thresholds but below $34,000 (single) or $44,000
(joint) then the amount of benefits subject to tax is the lesser of: (1) 50 percent of benefits, or (2)
50 percent of income above the tax-exempt thresholds.

If provisional income exceeds $34,000 (single) or $44,000 (joint), then the amount of benefits
subject to tax is the lesser of: (1) 85 percent of benefits, or (2) 85 percent of income above the
second threshold, plus the smaller of (a) $4,500 for single filers or $6,000 for joint filers, or (b) 50
percent of benefits. For married people filing separately, taxable benefits are the lesser of 85
percent of benefits or 85 percent of provisional income. The income thresholds described above
are not indexed for inflation.

The proceeds from taxation of Social Security and Railroad Retirement benefits at the 50 percent
level are credited to the Social Security Trust Fund and the National Railroad Retirement
Investment Trust. The proceeds of the taxation of benefits at the 85 percent level are credited to
the Medicare Hospital Insurance Trust Fund.

PURPOSE: The purpose of the exclusion is to treat Social Security and Railroad Retirement
benefits more like other pension income, thereby enhancing horizontal equity. Social Security
and Railroad Retirement benefits were tax-free until 1984, unlike other pension benefits which
are fully taxable except for the proportion of projected lifetime benefits that can be attributed to
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Page 90
the workers contributions. The Social Security amendments of 1983 (P.L. 98-21) made 50
percent of benefits above threshold amounts taxable, and the Omnibus Budget Reconciliation Act
of 1993 (P.L. 103-66) created the second level in which 85 percent of benefits above the
threshold are subject to taxation.

The Congressional Research Service points out that the exemption level as well as the progressive
rates for the taxing of benefits reflect the social welfare goals of Social Security, which differs
from a regular pension program in basing its benefits on work history and providing additional
benefits to people with lower earnings.
159

IMPACT: CRS observes that, Under the current two-level structure, all Social Security
beneficiaries have some untaxed benefits. Taxes are imposed on at least half of the benefits for
middle- and upper-income beneficiaries, while lower-income beneficiaries have no benefits
taxed.
160
In 2005, 61 percent of Social Security and Tier 1 Railroad Retirement recipients paid
no tax on their benefits.
161

President Bushs Advisory Panel on Federal Tax Reform criticized the two-tiered structure for the
taxation of Social Security and railroad retirement benefits for being overly complicated and
permitting bracket creep, which means that more and more recipients cross the income
thresholds each year due to inflation and are required to pay more tax.
162

159

160

161
162
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Income Tax
Exclusions

51. Survivor annuities paid to families of public safety officers

Internal Revenue Code Section: 101(h)

DESCRIPTION: The surviving spouse or child of a public safety officer killed in the line of duty
can exclude from gross income a survivor annuity payment under a government pension plan.
The annuity must be attributable to the individuals service as a public safety officer.

PURPOSE: According to the Congressional Research Service, Congress believed that surviving
spouses of public safety officers killed in the line of duty should be subject to the same rules as
survivors of military service personnel killed in combat.
163

IMPACT: Surviving family members of officers killed in the line of duty benefit from this
provision.

163
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Income Tax
Exclusions

52. Workers compensation benefits

Internal Revenue Code Section: 104(a)(1)
l Total
Total $8,313 $8,581 $8,939 $9,296

DESCRIPTION: Workers compensation benefits (both medical and non-medical benefits)
granted to employees in the case of work-related injury, and to survivors in case of an employees
work-related death, are not taxable. Employers finance the benefits through insurance or self-
insurance, and their costs are deductible as a business expense. Benefits are paid regardless of
who was at fault, and workers compensation is treated as the exclusive remedy for work-related
injury or death. Workers compensation programs are administered by the states.

PURPOSE: The Congressional Research Service states that no rationale for the exclusion is
found in the legislative history (the provision was enacted in 1918), But it has been maintained
that workers compensation should not be taxed because it is in lieu of court-awarded damages
for work-related injury or death that, before enactment of workers compensation laws would
have been payable under tort law for personal injury or sickness and not taxed.
164

IMPACT: CRS states that, The exclusion from taxation of employer contributions for workers
compensation medical benefits provides a tax benefit to any worker covered by the workers
compensation program, not just those actually receiving medical benefits in a particular year.
165

CRS further points out that, Not taxing employer contributions to workers compensation
subsidizes these benefits relative to taxable wages and other taxable benefits, for both the
employee and employer. The exclusion allows employers to provide their employees with
workers compensation coverage at a lower cost than if they had to pay the employees additional
wages sufficient to cover a tax liability on these medical benefits.
166

A possible unintended consequence of the tax expenditure is that it reduces the employers cost
of compensating employees for accidents on the job and can be viewed as blunting financial
incentives to maintain safe workplaces.
167

164

165

166

167
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Income Tax
Exclusions

53. Active income of controlled foreign corporations

Internal Revenue Code Sections: 11, 882, and 951-964
CTotal
Total $28,661 $31,208 $33,119 $36,361

DESCRIPTION: When a U.S. firm earns income through a foreign subsidiary, the income is
exempt from U.S. corporate taxes as long as it remains in the hands of the foreign subsidiary.
Therefore, federal taxes are deferred until the income is repatriated to the U.S. parent firm as
dividends or other income. This deferral represents a tax expenditure.

When the foreign income is repatriated, the U.S. parent corporation can credit foreign taxes paid
by the subsidiary against U.S. taxes owed on the repatriated income. If a U.S. firm invests in a
country or countries with low tax rates, the tax benefit from the deferral can be particularly large.

PURPOSE: The purpose of this tax deferral is to encourage the purchase and operation of foreign
subsidiaries by U.S. firms, thereby increasing U.S. firms penetration of foreign markets and
enhancing the firms global competitiveness. Proponents also contend that the tax deferral boosts
U.S. exports.

IMPACT: U.S. multinational firms with foreign operations in low-tax countries benefit from this
provision because they can shield more of their income from taxation. The Congressional
Research Service observes that, (E)conomic theory suggests that a tax incentive such as deferral
does not promote the efficient allocation of investment. Rather, capital is allocated most
efficiently and world economic welfare is maximized when taxes are neutral and do not
distort the distribution of investment between the United States and abroad. Economic theory
also holds that while world welfare may be maximized by neutral taxes, the economic welfare of
the United States would be maximized by a policy that goes beyond neutrality and poses a
disincentive for U.S. investment abroad.
168

CRS also points out that deferral probably benefits capital and foreign labor, but may reduce the
general U.S. wage level by lowering the stock of capital located in the U.S. CRS states that,
Because the U.S. capital-labor ratio is therefore probably lower it otherwise would be and U.S.
labor has less capital with which to work, deferral likely reduces the general U.S. wage level.
169

168

169
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Income Tax
Exclusions

54. Allowances for federal employees working abroad

CTotal
Total $8,484 $8,908 $9,332 $9,757

DESCRIPTION: U.S. federal civilian employees working abroad are allowed to exclude from
personal taxable income certain special allowances that are provided to offset the costs of living
abroad, such as the costs of housing, education, and travel. Like other U.S. citizens, federal
employees who work abroad are subject to U.S. taxes and can credit any foreign taxes paid
against their U.S. taxes.

PURPOSE: The purpose of this exclusion is to offset the extra costs of working abroad (such as
maintaining a home in the U.S. and in the foreign country) and to encourage employees to accept
assignments abroad.

IMPACT: Federal civilian employees working abroad benefit from this provision. The tax
expenditure can be seen as promoting equity by making sure that federal employees working
abroad are not taxed on allowances that serve as reimbursement for employment expenses. At the
same time, the exclusion may also encourage federal agencies to provide more compensation in
the form of generous special allowance than would otherwise be the case, thereby undermining
efficiency.

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Income Tax
Exclusions

55. Income earned abroad by U.S. citizens

CTotal
Total $5,563 $6,583 $7,696 $8,530

DESCRIPTION: U.S. citizens who live abroad (except for U.S. government employees, who
benefit from a separate exclusion described under tax expenditure #54) were allowed to exclude
up to $95,100 in earned income from personal taxable income in 2012. The limit on excludable
income is adjusted annually for inflation. A taxpayer must meet foreign residence tests to receive
the exclusion. Taxpayers may also exclude a certain amount of foreign housing expenses from
taxable income.
170
The combined income and housing exclusion cannot exceed the taxpayers
total foreign earned income for that year, including the value of a housing allowance.

PURPOSE: The purpose of this exclusion is to compensate U.S. citizens working abroad for the
costs of living overseas and the taxes they pay to the foreign country where they live. When the
exclusion was originally adopted in 1926, proponents argued that it would bolster U.S. trade
performance, since it would provide tax relief to U.S. expatriates engaged in trade promotion.
171

IMPACT: U.S. citizens who live and work abroad benefit from this provision. The
Congressional Research Service points out that, The impact of the exclusions on Americans
working abroad depends partly on whether their foreign taxes are higher or lower than their U.S.
taxes (before taking the exclusion into account). For expatriates who pay high foreign taxes, the
exclusion holds little importance, because they can use the foreign tax credit to offset their U.S.
tax liability For expatriates who pay little or no foreign taxes, however, the exclusion can
reduce or eliminate their U.S. tax liability.
172

The uniform allowable income exclusion also may exceed the additional costs of living in some
countries, while failing to compensation for the additional costs in higher-cost countries.

Employers also benefit because the exclusion subsidizes the transfer of employees to positions
overseas; without the exclusion, employers might have to reimburse employees for the taxes paid
on their housing and other expenses of living abroad.

170
The housing exclusion is equal to the amount by which housing costs exceed 16 percent of the earned
income exclusion, but cannot exceed 30 percent of the maximum earned income exclusion (which was
$95,100 in 2012). In addition, the Treasury Department has the authority to raise the maximum housing
exclusion above these levels in high-cost cities.

171

172
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Income Tax
Exclusions

56. Inventory property sales source rule exception

CTotal
Total $1,969 $2,027 $2,142 $2,200

DESCRIPTION: This provision allows firms to exclude certain export income from the
corporate income tax by allocating the income from sales of inventory property to foreign rather
than U.S. sources. If the inventory is both manufactured and sold by a firm, it can exempt up to
50 percent of the combined income from U.S. taxes. If the firm earns income only from the sale
of the inventory, it can exempt all of the income from U.S. taxes.

This rule on the taxation of inventory property can enable a firm to escape U.S. corporation tax
entirely (not just on the portion of income that is attributable to the manufacture or sale of
inventory property) because it increases the amount of foreign tax paid, which can be credited
against U.S. taxes. Many firms have excess credits from prior foreign-source income, so they
can reduce their U.S. taxable income by increasing the amount of their income that is attributed to
foreign sources. The tax treatment of inventory property represents a tax expenditure because
income from other types of property, such as personal property, cannot be allocated to foreign
countries in this way.

PURPOSE: The purpose of the exclusion is to assist U.S. businesses that are engaged in
international trade. The Tax Reform Act of 1986 provided that income from the sale of personal
property was generally to be attributed to the home country where the seller resides.
Nevertheless, Congress was concerned that this rule would create difficulties for U.S. export
firms, and therefore made the exemption for inventory property.
173

IMPACT: Businesses that export goods to other countries are the intended beneficiaries of this
provision. Still, the Congressional Research Service notes that, In the long run the burden of
the corporate income tax (and the benefit from corporate tax exemptions) probably spreads
beyond corporate stockholders to owners of capital in general. Thus, the source-rule benefit is
probably shared by U.S. capital in general, and therefore probably disproportionately benefits
upper-income individuals. To the extent that the rule results in lower prices for U.S. exports, a
part of the benefit probably accrues to foreign consumers of U.S. products.
174

The Congressional Budget Office points out that this rule allows firms to classify up to half of
their exports as foreign sourced even though the value of those goods was generally created or
added in the United States. This rule allows domestic export income that is not subject to

173

174
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Page 97
foreign taxes to be exempted from U.S. taxes as well, so the income escapes corporate taxation
altogether.
175

175
Congressional Budget Office, Options for Reducing the Deficit: 2014 to 2023, November 2013, pp. 164-
65.
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Income Tax
Exclusions

57. Benefits and allowances for armed forces personnel

Ttal
Total $3,030 $3,272 $3,454 $3,575

DESCRIPTION: Military personnel receive a variety of in-kind benefits that are not taxed.
These include medical and dental benefits, group life insurance, professional education and
dependent education, moving and storage, premiums for survivor and retirement protection plans,
subsistence allowances, uniform allowances, housing allowances, overseas cost-of-living
allowances, evacuation allowances, family separation allowances, travel for consecutive overseas
tours, emergency assistance, family counseling, defense counsel, burial and death services, and
travel of dependents to a burial site. Any cash payments given in lieu of the benefits are also
excluded from taxable income.

In addition, payments made to families when members of the armed forces die on active duty or
while traveling to or from active duty are excluded from taxation.
176

PURPOSE: The purpose of the exclusion is to recognize the sacrifices made by members of the
armed forces, and to establish that the in-kind benefits paid to active personnel are not part of
taxable income, partly due to the difficulty of assigning monetary values to the benefits.

IMPACT: Military service members and their families benefit from the exclusion. The
Congressional Research Service states that, Some see the provision of compensation in a tax-
exempt form as an unfair substitute for additional taxable compensation. The tax benefits that
flow from an exclusion do provide the greatest benefits to high- rather than low-income military
personnel.
177
The exclusion may also harm efficiency by encouraging the Defense Department
to provide members of the armed forces with a greater share of non-cash benefits than they would
prefer. According to the U.S. Government Accountability Office, non-cash benefits and deferred
compensation accounted for 51 percent of service members total compensation in 2004, much
higher than the comparable figure for civilian employment (estimated at less than 33 percent).
178

176
Families of a deceased member of the armed forces receive a $100,000 death gratuity payment.

177

178
U.S. Government Accountability Office, Military Personnel: DOD Needs to Improve the Transparency
and Reassess the Reasonableness, Appropriateness, Affordability, and Sustainability of Its Military
Compensation System, GAO-05-798 (July 2005), pp. 21-23.
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Income Tax
Exclusions

58. Combat pay

Ttal
Total $545 $606 $727 $788

DESCRIPTION: Pay received by active members of the U.S. Armed Forces is excluded from
gross income during any month in which the member served in a combat zone or was hospitalized
as the result of an injury or illness incurred while serving in a combat zone. For commissioned
officers, the exclusion is limited to the maximum compensation for active enlisted military
personnel. For hospitalized service members, the exclusion is limited to two years after he or she
ended service in the combat zone.

PURPOSE: The Congressional Research Service states that, Generally, compensation paid to
active military personnel in a combat zone is increased to reflect the hazards inherent to duty in a
combat zone. Excluding combat pay from taxation may reflect general public recognition of such
military service.
179

IMPACT: The exclusion of combat pay significantly reduces (for commissioned officers) or
eliminates (for enlisted personnel) tax liability of active military personnel serving in a combat
zone.

179
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Income Tax
Exclusions

59. Military disability benefits

Internal Revenue Code Section: 104(a)(4), 104(a)(5), and 104(b)
Total
Total $121 $121 $182 $182

DESCRIPTION: Service members who become physically unfit to perform military duties can
be retired on military disability under certain conditions. Individuals who were members of the
armed forces on or before September 24, 1975, may be eligible for the exclusion of disability pay
from personal taxable income. The amount of military disability pay for these individuals is
based on either of two methods. Under the percentage-of-disability method, the pension equals
the percentage of disability multiplied by the terminal monthly basic pay. Under the years-of-
service method, terminal monthly basic pay is multiplied by the number of service years times
2.5. Only the portion that would have been paid under the percentage-of-disability method is
excluded from gross income.

Individuals who joined the armed forces after September 24, 1975, may exclude military
disability payments equivalent to disability payments they could have received from the U.S.
Department of Veterans Affairs. Otherwise, their disability payments may be excluded only if
the disability is directly attributable to a combat-related injury.

Under the Victims of Terrorism Tax Relief Act of 2001, any civilian or member of the military
whose disability is attributable to terrorism or military action anywhere in the world may exclude
disability income from gross income.

PURPOSE: The purpose of the exclusion is to compensate veterans for economic hardship
created by injury or illness. According to the Congressional Research Service, a blanket
exclusion for military disability pay was enacted in 1942, based partly on the view that military
disability pay was similar to workers compensation, which was excluded from the federal
income tax. In 1976, Congress tightened the exclusion due to concern about abuses by armed
forces personnel who were classified as disabled shortly before becoming eligible for retirement
in order to obtain tax-exempt treatment for their pension benefits.
180
However, those who joined
the military on or before September 24, 1975, were allowed to continue under the prior rules.

IMPACT: Military veterans who are retired on disability benefit from this exclusion. CRS
observes that, Disability pension payments that are exempt from tax provide more net income
than taxable pension benefits at the same level. The tax benefit of the provision increases as the
marginal tax rate increases, and is greater for higher-income individuals.
181

180

181
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Income Tax
Exclusions

60. Contributions in aid of construction for water and sewer utilities

Internal Revenue Code Section: 118(c) and 118(d)
Peonal Total

DESCRIPTION: Contributions in aid of construction received by regulated water and sewage
disposal utilities are not included in the utilities gross income if the contributions are spent for
the construction of new facilities within two years. Contributions in aid of construction are
charges paid by utility customers, usually builders or developers, to cover the cost of expanding,
improving, or replacing water or sewage disposal facilities in order to serve housing subdivisions,
industrial plants, and manufacturing parks. Contributions that are an advance of funds and
require repayment are also excluded from the utilities income. Connection fees charged to
customers for installing lines cannot be excluded from income unless the lines will serve multiple
customers. This tax expenditure allows the utility to treat the contribution as a tax-free addition
to its capital rather than treating it as taxable income.

PURPOSE: The purpose of the exclusion is to encourage modernization of water and sewage
facilities. The Tax Reform Act of 1986 repealed a similar subsidy that applied not only to water
and sewage facilities, but also to utilities that provided steam, electricity, and gas. Congress
reinstated the subsidy for water and sewage facilities in 1996 based on concern that the repeal had
inhibited community development and the modernization of water and sewage plants.
182

IMPACT: Builders and developers benefit from the tax expenditure because the required
contribution is smaller if the utility does not have to pay taxes on the amount. Nevertheless, the
Congressional Research Service notes that the ultimate beneficiaries are unclear because, To the
extent that the lower charges to builders and developers for contributions in aid of construction
are passed on to ultimate consumers through lower prices, the benefit from this special tax
treatment accrues to consumers. If some of the subsidy is retained by the builders and developers
because competitive prices do not require it to be passed forward in lower prices, then the special
tax treatment also benefits the owners of the firms.
183
CRS adds that, Absent a public policy
justification, such subsidies distort prices and undermine economic efficiency.
184

182

183

184
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Income Tax
Exclusions

61. Earnings of certain environmental settlement funds

Internal Revenue Code Section: 468B

DESCRIPTION: Hazardous waste site cleanup is sometimes funded by environmental settlement
funds, which serve the same purpose as an escrow account. These funds are established in
consent decrees between the U.S. Environmental Protection Agency (EPA) and the parties
responsible for contaminating a site, under the jurisdiction of a federal district court. This
provision allows businesses that contribute to certain environmental settlement funds to exclude
the earnings on those contributions from taxable income. In effect, the provision lowers the after-
tax cost to a business of reaching a settlement with the EPA to clean up hazardous wastes
identified through the Superfund program.

PURPOSE: The purpose of the exclusion is to give parties deemed responsible for hazardous
waste sites an incentive to enter into an agreement with the EPA to clean up the sites.

IMPACT: Businesses that establish environmental settlement funds during the eligible period
benefit from this provision. The Congressional Research Service states that, The tax
expenditure tied to the provision lies in the fund income that escapes taxation.
185

There may also be a broader public benefit because the exclusion should encourage those
responsible for hazardous wastes to act more quickly to remediate the sites at their own expense,
which also saves tax dollars that would otherwise be needed to perform the remediation.

185
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Income Tax
Exclusions

62. Energy conservation subsidies provided by public utilities

Total

DESCRIPTION: Residential energy customers can exclude from personal taxable income any
subsidy they receive from a public utility for purchasing or installing an energy conservation
device. If an energy conservation expenditure qualifies for this exclusion, the taxpayer may not
claim any other tax benefits for the same expenditure.

PURPOSE: The purpose of the exclusion is to encourage residential customers to participate in
conservation programs sponsored by public utilities. These programs would enhance the energy
efficiency of dwelling units and encourage energy conservation in residential buildings.

IMPACT: Homeowners who participate in conservation programs and install energy-saving
devices benefit from this provision. The Congressional Research Service points out that this tax
preference might be justified on the grounds of conservation, if consumption of energy resulted
in negative effects on society, such as pollution. In general, however, it would be more efficient
to directly tax energy fuels than to subsidize a particular method of achieving conservation. From
an economic perspective, allowing special tax benefits for certain types of investment or
consumption results in a misallocation of resources.
186

CRS also notes that complex incentives are at play in the case of rental housing. Both the tenant
and landlord lack a strong financial incentive to invest in energy conservation equipment because
the benefits may not accrue entirely to the party paying the cost. Tenants may not occupy a rental
property long enough to reap the benefits of energy conservation measures, whereas landlords
may not have sufficient control over the behavior of renters to be sure that the investment in
energy conservation will pay off. As a result, These market failures may lead to
underinvestment in conservation measures in rental housing and provide the economic rationale
for this provision. Nevertheless, the exclusion is available both to owners who occupy their
homes and those who rent them out.
187

186

187
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Income Tax
Exclusions

water, sewer, and hazardous-waste facilities

Internal Revenue Code Sections: 103, 141, 142, and 146.
Total
Total $366 $366 $366 $366

sewage facilities, facilities used to supply water, and facilities that dispose of hazardous waste is
tax-exempt. The bonds are classified as private-activity bonds, rather than governmental bonds,
if a substantial portion of the benefits accrues to private organizations instead of the general
public. The private-activity bonds issued for these facilities are subject to a state annual volume
cap, which was the greater of $95 per capita or $284.6 million in 2012.

In order to qualify for tax-exempt bond financing, water-supply facilities must serve the general
public, and must be operated by a governmental unit or have their rates established or approved
by a government regulator. The portion of a hazardous waste facility that can be financed with
tax-exempt bonds cannot exceed the portion of the facility to be used by entities other than the
owner or operator of the facility.

PURPOSE: The purpose of the bonds is to provide low-cost financing of water, sewer, and
hazardous-waste facilities. Investors purchase the bonds at low interest rates because the income
from them is tax-free.

IMPACT: The Congressional Research Service suggests that tax-exempt financing of water,
sewer, and hazardous waste facilities has general public benefits because the subsidy helps
correct a market failure that may lead to underinvestment. The benefits of the facilities to the
environment and public health cross state and local borders, but state and local governments may
not recognize the spillover benefits when setting spending levels. CRS adds that, (T)here are
significant costs, real and perceived, associated with siting an unwanted hazardous waste facility.
The federal subsidy through this tax expenditure may encourage increased investment as well as
spread the cost to more potential beneficiaries, federal taxpayers.
188

CRS also cautions that, As one of many categories of tax-exempt private-activity bonds, bonds
for these facilities increase the financing cost of bonds issued for other public capital. With a
greater supply of public bonds, the interest rate on the bonds necessarily increases to attract

188

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Page 105
investors. In addition, expanding the availability of tax-exempt bonds increases the assets
available to individuals and corporations to shelter their income from taxation.
189

189

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Income Tax
Exclusions

64. Employer-provided adoption assistance

Total
Total $89 $89 $80 $77

DESCRIPTION: Benefits that a taxpayer receives through an employer-sponsored adoption
assistance program are excluded from personal taxable income. The employer-sponsored benefits
must be provided according to a written plan, and qualified expenses that are eligible for
deduction include reasonable and necessary adoption fees, court costs, attorney fees, and
traveling expenses. In the case of a special-needs adoption, expenses such as construction,
renovations, or alterations may qualify for the exclusion.

For tax year 2012, the maximum exclusion was $12,650 per child. The deduction was phased out
for taxpayers with modified adjusted gross income between $189,710 and $229,710; at higher
income levels, there is no benefit. The maximum deduction, and the income levels over which
the benefits are phased out, are indexed for inflation.

Qualified adoption expenses that are claimed under this exclusion cannot also be claimed for the
federal adoption tax credit (and vice-versa). The exclusion also does not cover any expenses paid
by a federal, state, or local grant.

PURPOSE: The purpose of the exclusion is to encourage and facilitate adoption by reducing the
associated financial costs.

IMPACT: The exclusion primarily benefits middle-income families because it is phased out for
wealthy taxpayers. There may also be more general benefits to society by helping children find
permanent adoptive homes. The Congressional Research Service also points out that the federal
government administers a direct assistance program for people adopting children with special
needs, and that there has been an ongoing debate about whether adoption assistance (whether
targeted to children with special needs or all children) should be administered through direct-
expenditure programs or through the tax system.
190

190
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Income Tax
Exclusions

65. Employer-provided dependent care

Total
Total $1,511 $1,609 $1,698 $1,804

DESCRIPTION: Employer payments for dependent care through a dependent-care assistance
program are not included in an individuals personal taxable income. The maximum annual
exclusion is $3,000 for one dependent and $6,000 for two or more dependents, and may not
exceed the lesser of the employees earned income or the earned income of the employees
spouse. To qualify, the employer assistance must be provided through a plan that meets certain
conditions, such as eligibility requirements that do not discriminate in favor of highly-
compensated employees, shareholders, or owners.

Qualifying dependent-care expenses include household services, day care centers, and other
similar types of non-institutional care. Dependents must be under the age of 13, except for a
physically or mentally incapacitated spouse or dependent who lives with the taxpayer for more
than half of the year. Day care centers must comply with state and local laws and regulations for
the exclusion of payments to be allowable. Payments to relatives are allowable only if the
relatives are not dependents of the taxpayer, or a child of the taxpayer under age 19.

PURPOSE: The Congressional Research Service states that the exclusion was intended to
provide an incentive for employers to become more involved in the provision of dependent care
services for their employees.
191

IMPACT: CRS notes that the exclusion provides an incentive for employers to provide, and
employees to receive, compensation in the form of dependent-care assistance rather than cash
As is the case with all deductions and exclusions, this benefit is related to the taxpayers marginal
tax rate and, thus, provides a greater benefit to taxpayers in high tax brackets than those in low
tax brackets.
192
Nevertheless, the $6,000 limit on the exclusion restricts the benefit for upper-
income families.

CRS further observes that, The income tax exclusion violates the economic principle of
horizontal equity, in that all taxpayers with similar incomes and work-related child care expenses
are not treated equally. Only taxpayers whose employers have a qualified child care assistance
program may exclude from income taxes a portion of their work-related child care expenses.
193

191

192

193
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The horizontal equity problem is one reason why President Bushs Advisory Panel on Federal
Tax Reform called for repeal of the exclusion.
194

On the other hand, CRS states that, (I)t is generally believed that the availability of dependent
care can reduce employee absenteeism and unproductive work time. The tax exclusion may also
encourage full participation of women in the work force as the lower after-tax cost of child care
may not only affect labor force participation but hours of work Those employers that may gain
most by the provision of dependent-care services are those whose employees are predominantly
female, younger, and whose industries have high personnel turnover.
195

194

195
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Income Tax
Exclusions

66. Foster care payments

l Total
Total $536 $536 $536 $536

DESCRIPTION: Payments made by a state, local, or qualified foster-care placement agency to a
provider who cares for a foster child in the home are excluded from the personal taxable income
of the provider. The exclusion applies both to reimbursements for the general cost of caring for a
foster child as well as additional payments provided for the care of a child with physical, mental,
or emotional handicaps (the latter are referred to as difficulty of care payments).

The exclusion does not cover foster care payments made for more than five children aged 19 or
older under the standard reimbursement rates or the difficulty of care reimbursement rates, nor
does it cover payments for more than 10 children under the age of 19 who are eligible for
difficulty of care rates.

PURPOSE: According to the Congressional Research Service, the exclusion of qualified foster
care payments was made to relieve foster care providers from the detailed record-keeping
requirements of prior law, which disallowed any exclusion in excess of the actual expenses paid
in caring for a foster child. Congress feared that detailed and complex record-keeping
requirements might deter families from accepting foster children or from claiming the full tax
exclusion to which they were entitled.
196

IMPACT: CRS observes that, It is generally conceded that the tax law treatment of foster care
payments provides administrative convenience for the Internal Revenue Service, and prevents
unnecessary accounting and record-keeping burdens for foster care providers. The trade-off is
that to the extent foster care providers receive payments over actual expenses incurred, monies
which should be taxable as income are provided an exemption from individual income and
payroll taxes.
197
Children in foster care may benefit from the exclusion because the reduction in
the administrative burden may encourage more people to become foster parents, and there may be
a broader social benefit from encouraging the placement of children in foster care.

196

197
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Income Tax
Exclusions

67. Employer-provided transportation assistance

Internal Revenue Code Section: 132(f)
Year Enacted in Federal Law: 1984 (parking benefits) and 1992 (transit benefits)
CTotal
Total $4,737 $5,095 $5,542 $5,989

DESCRIPTION: Taxpayers are allowed to exclude up to $245 per month for employer-paid
parking in 2013, as well as an additional $245 per-month for employer-provided transit passes or
van-pool benefits.
198
A transit pass means any pass, token, fare card, voucher, or similar item
that entitles an individual to transportation in a mass-transit system or through a commuter
highway vehicle (van pool). The maximum monthly exclusions for employer-provided parking
and transit assistance are adjusted annually for inflation.

In addition, bicycle commuters may exclude as much as $20 per month in employer
reimbursements of their commuting expenses. Nevertheless, the exclusion for bicycle
commuting expenses is not allowable if the employee does not receive mass transit or parking
benefits from his or her employer. The $20 cap per month is not adjusted for inflation.

Employees can use pre-tax dollars, at their employers discretion, to pay for parking or mass
transit benefits. The pre-tax option is not available for bicycle commuting benefits, which must
be paid directly by the employer.

PURPOSE: The exclusion is part of a general policy of excluding employer-provided benefits
from taxable income. The exclusion is capped to place a limit on the ability of employers and
employees to shift compensation from taxable wages to non-taxable fringe benefits.

IMPACT: The Congressional Research Service states that, The subsidy benefits both
employees, through higher compensation, and their employers, who may face lower wage
costs.
199
Approximately 6 percent of the civilian workforce receives subsidized transportation
benefits.
200

With regard to mass transit, CRS observes that, Subsidies for mass transit and vanpools
encourage the use of mass transportation and may reduce congestion and pollution. Some studies
have found that transportation benefit programs can spur non-users of public transportation to
become occasional users, and occasional users to become more regular users If workers

198
U.S. Department of the Treasury, Internal Revenue Service, Employers Tax Guide to Fringe Benefits
For Use in 2013 (Publication 15-B, issued January 18, 2013), p. 19.

199

200
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Page 111
commute in ways that reduce traffic congestion, all commuters in an area may enjoy spillover
benefits such as lower transportation costs, shorter waiting times in traffic, and improved air
quality.
201
Nevertheless, Businesses and workers located where mass transportation
alternatives are lacking gain little benefit from this provision.
202

With regard to parking, CRS points out that, Subsidies or favorable tax treatment of parking may
encourage more employees to drive to work, which may increase traffic congestion and air
pollution. One study found that when employees in California firms became able to opt for a
cash benefit instead of employer-provided parking benefits, the proportion of employees driving
to work fell significantly. Subsidized employee parking may also make finding parking spaces
harder, which can affect quality of life in residential neighborhoods near work areas and the flow
of customers for retail businesses.
203

201

202

203
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Income Tax
Exclusions

airport, dock, and mass commuting facilities

l Total
Total $732 $835 $835 $835

DESCRIPTION: Each state receives a certain amount of authority to issue tax-exempt private
activity bonds, which are securities issued by a state or local government to finance qualified
projects by a private user. These qualified projects, which include the construction of airports,
docks, wharves, and mass commuting facilities, are expected to have a public benefit.

Although private-activity mass commuting facility bonds are subject to annual volume caps on
private-activity bonds (the cap was $95 per capita or $284.6 million, whichever is greater, for
each state in 2012), bonds issued for airports, docks, and wharves are not subject to the caps.

PURPOSE: The purpose of the bonds is to promote the construction of airport, dock, wharf, and
mass-transit infrastructure by subsidizing low interest rates, thereby lowering the cost of the
facilities and supporting commerce. Investors purchase the bonds at low interest rates because
the income from them is tax-free.

IMPACT: The owners of airport, dock, wharf, and mass-transit infrastructure, as well as the
businesses and residents who use these facilities, benefit from this provision. There may also be
spillover benefits from such investment. According to the Congressional Research Service,
Economic theory suggests that to the extent these facilities provide social benefits that extend
beyond the boundaries of the state or local government, the facilities might be underprovided due
to the reluctance of state and local taxpayers to finance benefits for nonresidents.
204

CRS also identifies potential costs of these private activity bonds, stating that, As one of many
categories of tax-exempt private-activity bonds, those issued for airports, docks, wharves, and
mass commuting facilities increase the financing cost of bonds issued for other public capital.
With a greater supply of public bonds, the interest rate on the bonds necessarily increases to lure
investors. In addition, expanding the availability of tax-exempt bonds increases the assets
available to individuals and corporations to shelter their income from taxation.
205

204

205
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Income Tax
Exclusions

highway projects and rail-truck transfer facilities

Internal Revenue Code Sections: 103, 141, 142(m), and 146
Cl Total

DESCRIPTION: States are authorized to issue tax-exempt private activity bonds, which are
securities issued by a state or local government to finance qualified projects by a private user.
These qualified projects, which include highway projects and surface freight transfer facilities
(truck to rail, or rail to truck) that receive federal aid, are expected to have a public benefit even
though a substantial portion of the benefits will accrue to private individuals or businesses.

These bonds are not subject to the federally-imposed annual state volume caps on private-activity
bonds, but there is a national limitation of $15 billion on the aggregate value of the bonds, which
are allocated by the U.S. Secretary of Transportation.

PURPOSE: According to the Congressional Research Service, in 2005 Congress authorized state
and local governments to issue tax-exempt bonds to finance highways and surface freight-transfer
facilities to enhance the efficiency of the nations long-distance freight transport infrastructure.
With more efficient intermodal facilities, proponents suggest that long-distance truck traffic will
shift from government-financed interstate highways to privately-owned long-distance rail
transport.
206
The bonds promote construction of highways and surface freight-transfer facilities
by subsidizing low interest rates, thereby lowering the cost of the facilities and supporting
commerce. Investors buy the bonds at low interest rates because the income earned is tax-free.

IMPACT: Private businesses should benefit from the construction of a more efficient system of
long-distance freight transportation, but there may be spillover benefits to society as well in the
form of economic development. CRS notes that, The facilities may be underprovided because
state and local taxpayers may be unwilling to finance benefits for nonresidents.
207
At the same
time, CRS points out that expanding tax-exempt private-activity bond issuance raises the
financing cost of bonds issued for other public capital. With a greater supply of public bonds,
the interest rate on the bonds necessarily increases to lure investors, CRS states. In addition,
expanding the availability of tax-exempt bonds increases the assets available to individuals and
corporations to shelter their income from taxation.
208

206

207

208
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Income Tax
Exclusions

70. G.I. bill education benefits

U.S. Code Section: U.S. Code Title 38, Section 5301 (not codified in the
Internal Revenue Code)
CTotal
Total $665 $720 $780 $847

DESCRIPTION: Higher education benefits that veterans receive under the G.I. bill are excluded
from the personal taxable income of recipients (as are all benefits provided by the U.S.
Department of Veterans Affairs).

Veterans who served on active duty for at least three years after September 11, 2001, and
received an honorable discharge, are eligible for payment of full tuition and fees at all in-state
public schools, as well as tuition and fees up to $19,200 per academic year at private or foreign
schools. These veterans can also receive an annual stipend of up to $1,000 for books and
supplies. Veterans who served for less than three years can qualify for partial benefits, depending
on their length of service.

Veterans who entered active duty before September 11, 2001, are eligible for up to 36 months of
education benefits, with the amount of benefits depending on length of service and other factors.

If a veteran receives another education-related tax benefit, such as the Hope Credit or Lifetime
Learning Credit, he or she must reduce the value of the other benefit by the amount of any G.I.
bill payment made on his or her behalf.

PURPOSE: The purpose of the exclusion is to recognize the service and the sacrifices that
veterans made for our country, and to help them prepare for civilian employment.

IMPACT: Veterans receiving education benefits under the G.I. bill benefit from this provision.
The tax savings will have greater value for veterans with higher incomes because they are in
higher marginal tax brackets. The U.S. military benefits as well, because the benefits provided
under the G.I. bill serve as a valuable recruitment tool.

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Income Tax
Exclusions

71. Veterans benefits and services

U.S. Code Section: U.S. Code Title 38, Section 5301 (not codified in the
Internal Revenue Code)
CTotal
Total $3,235 $3,565 $3,930 $4,350

DESCRIPTION: All cash payments provided by the U.S. Department of Veterans Affairs are
excluded from the personal taxable income of recipients. The payments include veterans death
benefits, disability compensation, and pension payments.

In addition, surviving spouses and parents of service members are eligible for dependency and
indemnity compensation payments if the service member died on active duty; died due to a
service-connected illness or condition; or was totally disabled for 10 or more years before death
due to a non-service-connected illness or condition (this period is reduced to five years if the
veteran was totally disabled upon leaving military service). These benefits are also exempt from
taxation.

PURPOSE: The purpose of the exclusion is to recognize the service performed by veterans and
the sacrifices they made for our country, and to provide income support to elderly veterans and
those with disabilities.

IMPACT: Individuals receiving veterans benefits and their families benefit from this provision.
The Congressional Research Service observes that, The exclusion of veterans benefits alters the
distribution of payments and favors higher-income individuals
209
because they face higher
marginal tax rates. CRS adds that, The rating schedule for veterans disability compensation was
intended to reflect the average impact of the disability on the average worker. However, because
the rating is not directly rated to the impact of the disability on the veterans actual or potential
earnings, the tax-exempt status of disability compensation payments may reflect a tax exemption
for an inaccurate estimate of the veterans lost earnings because of the disability.
210

Some analysts have contended that benefits could be focused on veterans who are most impaired
if those with disability ratings less than 30 percent were made ineligible for disability
compensation. Although 48 percent of veterans receiving disability compensation had a
combined rating of 30 percent or less, their disability compensation payments accounted for only
11 percent of all disability compensation payments for veterans.
211

209

210

211
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Income Tax
Adjustments

72. Classroom expenses of elementary and secondary school
educators

CTotal

DESCRIPTION: A teacher, aide, instructor, counselor, or principal who worked in a public or
private school at least 900 hours during the school year and paid for classroom supplies and other
materials (such as supplies, materials, books, and software) out of his or her pocket can deduct up
to $250 of such expenses. This deduction can be taken without itemizing (known as an
adjustment or an above-the-line deduction).

The deduction is limited to elementary and secondary school educators, and must be reduced by
the amount of any interest from an education savings bond, or any distribution from a qualified
tuition (section 529) program or a Coverdell education savings account that was excluded from
income. Educators in public charter schools are eligible. This provision expired on December
31, 2013, but it has previously been extended several times and Congress could reinstate it.

PURPOSE: The purpose of the adjustment is to assist educators in paying for out-of-pocket
classroom expenses. According to the Congressional Research Service, a deduction targeted at
educators was considered socially desirable because teachers voluntarily augment school funds
by purchasing items thought to enhance the quality of childrens education.
212

IMPACT: CRS observes that, The availability of the classroom expense deduction may
encourage educators who already are doing so to enhance their students educational experience,
and potentially encourages other educators to start doing the same. Alternatively, the deduction
may be a windfall to educators.
213
CRS also notes that the adjustment violates the principle of
horizontal equity, because workers in other occupations can only deduct business-related
expenses that exceed 2 percent of adjusted gross income.
214

212

213

214

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In tax year 2011, 6,672 District of Columbia tax filers claimed this adjustment. Tax filers with
federal adjusted gross income of less than $50,000 comprised 44 percent of the claimants and
accounted 44 percent of the total deductions.
215

215
These data are from the Internal Revenue Services Statistics of Income Tax Stats, Tax Year 2011:
Historic Table 2, available at www.irs.gov/taxstats/index.html.
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Income Tax
Adjustments

73. Higher education expenses


DESCRIPTION: For tax year 2013, certain taxpayers may deduct qualified tuition and related
expenses for postsecondary education from their adjusted gross income. This deduction can be
taken without itemizing (known as an adjustment or an above-the-line deduction). Taxpayers
may claim the deduction for qualified higher education expenses paid for themselves, a spouse, or
dependents. Qualified tuition and related expenses cover tuition and fees required for enrollment
in an institution eligible to participate in U.S. Department of Education student aid programs.
Part-time students as well as students in non-degree programs can claim the deduction.

The maximum deduction is $4,000 for single filers with a modified adjusted gross income that
does not exceed $65,000 and for joint filers with a modified adjusted gross income that does not
exceed $130,000. Taxpayers with income ranging from $65,000 to $80,000 in the case of single
filers, or $130,000 to $160,000 for joint filers, may deduct up to $2,000 in qualified higher
education expenses. Individuals above these income levels cannot make any deduction.

This provision expired on December 31, 2013, but it has previously been extended several times
and could be reinstated by Congress. The deduction limit and the income eligibility thresholds
are not indexed for inflation.

The deduction cannot be taken for qualified tuition and related expenses that are covered by the
Hope Scholarship Credit or the Lifetime Learning Credit, or by any other tax deduction such as
the itemized deduction for education expenses. In addition, any higher education expenses
financed by scholarships, Pell Grants, employer-provided educational assistance, veterans
assistance, or by tax-free interest, distributions, or earnings, are not eligible for the deduction.

PURPOSE: The Congressional Research Service states that the deduction is one additional
means that Congress has chosen to help families who are unlikely to qualify for much need-based
federal student aid to pay for escalating college expenses.
216

IMPACT: In tax year 2011, 7,363 District of Columbia tax filers claimed this adjustment. Tax
filers with federal adjusted gross income of less than $50,000 comprised 56 percent of the
claimants and accounted for 65 percent of the total amount deducted.
217
The relatively high

216

217
Historic Table 2, available at www.irs.gov/taxstats/index.html..
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percentage of the benefits claimed by low- and moderate-income households reflects the phasing
out of benefits at higher income levels.

CRS points out that, The maximum amount of deductible expenses limits the tax benefits
impact on individuals attending schools with comparatively high tuition and fees.
218
As one of
many tax incentives for postsecondary education (including the Hope Scholarship and Lifetime
Learning Credits, as well as education savings accounts and qualified tuition plans), the deduction
creates additional complexity for taxpayers and the IRS.

218

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Income Tax
Adjustments

74. Interest on student loans

Total $1,705 $1,705 $1,827 $1,827

DESCRIPTION: Taxpayers may deduct up to $2,500 in annual interest paid on qualified higher
education loans (the maximum deduction is not adjusted for inflation). The deduction is phased
out as income levels rise; in tax year 2012, the phase-out ranges were from modified adjusted
gross incomes of $60,000 to $75,000 for single filers and $125,000 to $155,000 for joint filers.
The deduction can be taken without itemizing (known as an adjustment or an above-the-line
deduction).

A qualified education loan represents indebtedness incurred solely to pay for qualified higher
education expenses, such as tuition, fees, and room and board, on behalf of a taxpayer, or his or
her spouse or dependents. The student must have been enrolled on at least a half-time basis in a
program leading to a degree, certificate, or credential at an institution eligible to participate in
U.S. Department of Education student aid programs, or at a hospital or health care facility that
offers internship or residency programs leading to a certificate or degree.

Interest on loans from relatives or qualified employer plans may not be deducted. The qualifying
expenses eligible for deduction must be reduced by the amount of any scholarship or other
payment that is excluded from the federal income tax. The deduction is not allowed for
individuals who can be claimed as a dependent by another taxpayer.

PURPOSE: According to the Congressional Research Service, the interest deduction was
authorized as one of a number of benefits intended to make postsecondary education more
affordable for middle-income families who are unlikely to qualify for much need-based federal
student aid. The interest deduction is seen as a way to help taxpayers repay education loan debt,
which has risen substantially in recent years.
219

IMPACT: In 2011, 34,998 District tax filers claimed the federal student loan adjustment. Tax
filers with federal adjusted gross income of less than $50,000 comprised 56 percent of the
claimants and accounted for 60 percent of the total amount deducted,
220
reflecting the phasing out
of the benefit at income levels from $60,000 to $75,000 (for individual returns) and $125,000 to
$155,000 (for joint returns).

219

220

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Page 121

Researchers from the Urban Institute have pointed out that, Units that receive the student loan
interest deduction differ from units receiving the other tax benefits because benefits accrue to
former students who have loans rather than current students and their families.
221

CRS also discusses the incentives created by the deduction as follows: The tax deduction can be
justified both as a way of encouraging persons to undertake additional education and as a means
of easing repayment burdens when graduates begin full-time employment. Whether the
deduction will affect enrollment decisions is unknown; it might only change the way families
finance college costs. The deduction may allow some graduates to accept public service jobs that
pay low salaries, although their tax savings would not be large. The deduction has been criticized
for providing a subsidy to all borrowers (aside from those with higher income), even those with
little debt, and for doing little to help borrowers who have large loans.
222

221
Leonard Burman, Elaine Maag, Peter Orszag, Jeffrey Rohaly, and John OHare, The Distributional
Consequences of Federal Assistance for Higher Education: The Intersection of Tax and Spending
Programs, Discussion Paper No. 26 of the Urban-Brookings Tax Policy Center, August 2005, p. 8.

222

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Income Tax
Adjustments

75. Contributions to health savings accounts

l
Total $1,044 $1,143 $1,242 $1,391

DESCRIPTION: Health savings accounts (HSAs) provide a tax-advantaged vehicle for people to
pay for medical expenses, such as deductibles and co-payments, which are not covered by
insurance. Eligible individuals can establish and fund an HSA if they have qualifying high-
deductible health insurance (at least $1,200 for single coverage and $2,400 for family coverage in
2012). The minimum deductible levels do not apply to preventive care. Furthermore, qualifying
health care plans cannot have limits on out-of-pocket expenditures that exceed $6,050 for single
coverage and $12,100 for family coverage in 2012. The goal is to make individuals more
conscious of health-care costs while protecting them from catastrophic costs.

For 2012, the annual contribution limit to an HSA was $3,100 for single coverage and $6,250 for
family coverage. Individuals who are at least 55 years old but not yet enrolled in Medicare can
contribute an additional $1,000 per year. Individuals may deduct their HSA contributions from
gross income in calculating their taxable income. An employer can also contribute to an HSA on
an employees behalf, and such contributions are not taxable to the employee or to the employer.
HSA account earnings are tax-exempt and unused balances may accumulate without limit.

Withdrawals from HSAs are exempt from federal income taxes if they are used for qualified
medical expenses. HSA withdrawals that are not used for qualified medical expenses are subject
to a 20 percent penalty and must be included in the gross income of the account owner in
determining federal tax liability.

PURPOSE: According to the Congressional Research Service, HSAs were created to (1) slow
the growth of health care costs by reducing reliance on insurance and making individuals more
aware of the costs of health care, and (2) help individuals finance future health care costs by
building up savings. CRS notes that, Taxpayers can carry their HSAs with them when they
change jobs, which, in theory, may help maintain continuity of health care if their new employer
offers different or perhaps no health insurance coverage.
223

IMPACT: A national estimate prepared by the U.S. Government Accountability Office indicated
that the average adjusted gross income for an HSA participant was almost $139,000 in 2005,
compared to $57,000 for all other filers.
224

223

224
U.S. Government Accountability Office, Health Savings Accounts: Participation Increased and Was
More Common among Individuals with Higher Incomes, GAO-08-474R, April 30, 2008, p. 6.
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Page 123

CRS observes that, HSAs could be an attractive option for many people. They allow individuals
to insure against large or catastrophic expenses while covering routine and minor costs out of
their own pocket. Properly designed, they may encourage more prudent health care use and the
accumulation of funds for medical emergencies. For these outcomes to occur, however,
individuals will have to put money into their accounts regularly (especially if their employer
doesnt) and to refrain from spending it for things other than health care.
225
In addition, it is not
clear if individual consumers of health care have the expertise necessary to judge whether they
can reduce their usage of health care or purchase lower-cost services without harming their
health, which is necessary for this market-based approach to work.

At the same time, HSAs could fracture the health care market. If HSAs primarily attract young,
healthy individuals, CRS states, premiums for plans without high deductibles are likely to rise
since they would disproportionately cover the older and less healthy individuals If this process
continued unchecked, eventually people who need insurance the most would be unable to afford
it.
226

People who finance more of their own health-care costs stand to benefit from HSAs, because they
otherwise enjoy a smaller subsidy from the exclusion of employer-provided health care. If an
employer-provided health plan switches to a higher deductible, employees would lose out in the
absence of an HSA. As CRS states, HSAs restore this benefit as long as the account is used for
health care expenses.
227

225

226

227
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Income Tax
Adjustments

76. Health insurance premiums and long-term care insurance
premiums paid by the self-employed

Internal Revenue Code Section: 162(l)
l Total
Total $3,818 $4,022 $4,227 $4,500

DESCRIPTION: Self-employed individuals may deduct amounts paid for health insurance
covering themselves, their spouses, or their dependents. In addition, self-employed individuals
may also reduce their taxable personal income by the amounts paid for qualified long-term care
insurance, subject to annual limits ranging from $360 for individuals age 40 and under to $4,550
for individuals over age 70 in 2013 (the limits are indexed for inflation). The deduction is taken
above the line, which means that it can be used regardless of whether the taxpayer itemizes
deductions on his or her tax return.

For the purpose of this deduction, a self-employed individual is defined as a sole proprietor,
working partner in a partnership, or employee of an S corporation who owns more than 2 percent
of the corporations stock. The following limitations apply: (1) the deduction cannot exceed a
taxpayers net earned income from the trade or business in which the health insurance plan was
established, minus deductions for 50 percent of the self-employment tax and any contributions to
a qualified pension plan, and (2) the deduction cannot be taken for any month when a self-
employed person is eligible to participate in a health insurance plan offered by an employer or a
spouses employer. If a self-employed person claims an itemized deduction for medical
expenses, those expenses must be reduced by the amount of this deduction.

PURPOSE: According to the Congressional Research Service, the purpose of the deduction is (1)
to provide the self-employed with a tax benefit comparable to the exclusion for employer-
provided health benefits, and (2) to improve access to health care by the self-employed.
228

IMPACT: CRS states that, The deduction lowers the after-tax cost of health insurance
purchased by the self-employed by a factor equal to a self-employed individuals marginal
income tax rate. Individuals who purchase health insurance coverage in the non-group market
but are not self-employed receive no such tax benefit. There is some evidence that the deduction
has contributed to a significant increase in health insurance coverage among the self-employed
and their immediate families. As one would expect, the gains appear to have been concentrated
in higher-income households.
229

228

229
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That pattern is evident in the District. In 2011, 8,923 District tax filers claimed the federal
adjustment for medical insurance premiums paid by the self-employed. Filers with federal
adjusted gross income of $200,000 or more represented 32 percent of the claimants and
accounted for more than half (54 percent) of the amount deducted.
230

CRS also describes some of the efficiency losses to society that may result from the deduction,
stating that, (A) 100-percent deduction is likely to encourage higher-income self-employed
individuals to purchase health insurance coverage that leads to wasteful or inefficient use of
health care. To reduce the likelihood of such an outcome, some favor capping the deduction at an
amount commensurate with a standardized health benefits package, adjusted for regional
variations in health care costs.
231

230

231

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Income Tax
Adjustments

77. Contributions to self-employment retirement plans

Internal Revenue Code Sections: 401-407, 410-418E, and 457
Total
Total $33,051 $34,979 $37,458 $39,937

DESCRIPTION: Self-employed taxpayers who contribute to their own retirement accounts may
deduct those contributions from their personal taxable income, up to certain limits. The
deduction is taken above the line, which means that it can be used regardless of whether the
taxpayer itemizes deductions on his or her tax return.

Taxes on the earnings of the retirement accounts are deferred until the funds are distributed
during retirement. The withdrawals from the plans are included in personal taxable income.
Therefore, the value of the tax expenditure equals the revenue that the government does not
collect on the retirement contributions and earnings, offset by the taxes paid on the pensions by
those who are currently drawing down the benefits.

One type of self-employment retirement plan is a simplified employee pension (SEP). A self-
employed taxpayer is allowed to deduct SEP contributions of as much as 25 percent of self-
employment income (net of any SEP contribution) or $51,000 in 2013 (whichever is less). There
are other retirement plan options for the self-employed, including 401(k) plans, other defined
contribution plans, and defined benefit plans.

PURPOSE: The purpose of the adjustment is to encourage the self-employed to save for
retirement.

IMPACT: In 2011, 5,417 District tax filers claimed this adjustment. The benefits were strongly
concentrated among upper-income households. Tax filers with federal adjusted gross income of
$200,000 or more represented the majority (59 percent) of the claimants and accounted for 82
percent of the total amount deducted.
232

The adjustment lowers the after-tax cost of retirement contributions made by the self-employed
by a percentage equal to a self-employed individuals marginal income tax rate, which
disproportionately benefits high-income households. The tax-favored treatment of some
retirement contributions as well as the earnings on those contributions may encourage individuals
to shift their savings from taxable accounts to tax-advantaged accounts without increasing total
savings. At the same time, the adjustment also promotes equity among self-employed individuals
and individuals who work at public or private-sector organizations.

232
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Income Tax
Adjustments

78. Employee contributions to traditional Individual Retirement
Accounts


Total $6,166 $6,722 $7,371 $7,974

DESCRIPTION: There are two types of Individual Retirement Accounts (IRAs) that offer tax
benefits: the traditional IRA and the Roth IRA. Contributions to a traditional IRA are tax-free for
those meeting income requirements, and the earnings on the contributions are tax-free, regardless
of income. The deduction is taken above the line, which means that it can be used regardless of
whether the taxpayer itemizes deductions on his or her tax return. Qualified distributions from
traditional IRAs are taxable. The pattern is reversed for a Roth IRA; the contributions are
taxable, while earnings and qualified distributions are tax-free. Participation in IRAs is
approximately evenly split between traditional IRAs and Roth IRAs.
233

Qualified distributions to a traditional IRA are those made after age 59, upon the death or
disability of the individual, or for first-time homebuyer expenses. An individual may contribute
up to $5,000 to a traditional IRA ($6,000 for an individual above the age of 50) or an amount
equal to earned income, whichever is less, but the tax benefits are limited based on income if a
taxpayer is covered by an employer-provided pension plan.

For taxpayers covered by a pension plan, the full deduction was allowed for tax year 2012 if
adjusted gross income was less than $58,000 for a single person or $92,000 for a married couple
filing jointly. The deduction was phased out over the $58,000 to $68,000 range for single filers
and the $92,000 to $112,000 range for joint filers. A taxpayer who is not covered by a pension
plan and whose spouse is also not covered is eligible to deduct the full amount of his or her
contribution to a traditional IRA, regardless of income.

The estimated value of the tax expenditure reflects the loss of revenue from the exclusion of
traditional IRA contributions and earnings, offset by the tax paid on withdrawals from the IRAs.

PURPOSE: The purpose of the exclusion is to provide an incentive for taxpayers to save for
retirement, and in particular to provide a savings incentive for workers who do not have
employer-provided pension plans.

IMPACT: Taxpayers who save for retirement through a traditional IRA benefit from this
provision. However, it is not known whether IRAs benefit society or increase overall levels of

233
Urban-Brookings Tax Policy Center, The Tax Policy Briefing Book: A Citizens Guide for the 2008
Election and Beyond, p. II-3-1, available at www.taxpolicycenter.org.
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Page 128
saving. It is possible that individuals simply shift existing savings into IRAs because of the tax
incentive.

Paul Burham and Larry Ozanne of the Congressional Budget Office state that, Empirical studies
have not been able to resolve the uncertainty about how IRAs affect saving, although many
attempts have been made. The evidence for the full population is contradictory, but a limited
consensus suggests that IRAs increased saving for nonelderly and less-wealthy families.
234

The Congressional Research Service points out that, IRAs tend to be less focused on higher-
income levels than some types of capital tax subsidies, in part because they are capped at a dollar
amount. Their benefits do tend, nevertheless, to accrue more heavily to the upper half of the
income distribution. This effect occurs in part because of the low participation rates at lower
income levels. Further, the lower marginal tax rates at lower income levels make the tax benefits
less valuable.
235

In 2011, 4,620 District tax filers claimed this deduction. More than two-thirds (69 percent) of the
claimants had federal adjusted gross income of less than $75,000, and they accounted for 56
percent of the total amount deducted.
236

234
Paul Burnham and Larry Ozanne, Individual Retirement Accounts, in The Encyclopedia of Taxation
and Tax Policy, Second Edition, Joseph Cordes, Robert Ebel, and Jane Gravelle, eds. (Washington, D.C.:
The Urban Institute Press, 2005), p. 199.

235

236
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Income Tax
Adjustments

79. Overnight travel expenses of National Guard and Reserve
members

Internal Revenue Code Section: 62(a)(2)(E) and 162
Total $50 $50 $50 $50

DESCRIPTION: A deduction from federal gross income is allowed for all unreimbursed
overnight travel, meals, and lodging expenses of National Guard and Reserve members. This
deduction can be taken without itemizing (known as an adjustment or above-the-line deduction).

To qualify, members must have traveled more than 100 miles away from home and stayed
overnight as part of an activity while on official duty. No deduction is permitted for commuting
expenses to and from drill meetings and the amount of expenses may not exceed the general
federal government per-diem rate applicable to that locale.

PURPOSE: The purpose of the adjustment is to reimburse members of the National Guard and
Reserve for expenses incurred in the line of duty. The Congressional Research Service states
that, In enacting the new deduction, Congress identified the increasing role that Reserve and
National Guard members fulfill in defending the nation and a heavy reliance on service personnel
to participate in national defense. Congress noted that more than 157,000 reservists and National
Guard were on active duty status most assisting in Operation Iraqi Freedom at the time of
enactment.
237

IMPACT: National Guard and Reserve members benefit from this provision. CRS notes that,
The tax deduction can be justified as a way of providing support to reservists and as a means of
easing travel expense burdens.
238
In addition, By providing military compensation in a form
not subject to tax, the benefits have greater value for members of the armed services with high
income than for those with low income.
239

237

238

239
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Income Tax
Deductions

80. Accelerated depreciation of buildings other than rental housing

Total
Total $345 $345 $403 $403

DESCRIPTION: This provision allows for accelerated depreciation of buildings as a deduction
from personal and corporate income tax. The standard method to calculate depreciation is the
straight-line method used under the alternative minimum tax, in which equal amounts are
deducted over 40 years. The accelerated method allows buildings used for purposes besides
rental housing to be depreciated over 39 years.

Also included in this tax expenditure are accelerated depreciation rules for qualified leasehold
improvements, qualified restaurant property, and qualified retail improvements (which have a 15-
year depreciation period) and for certain motorsports racetrack property (which has a seven-year
depreciation period). The special rules for qualified leasehold improvements, restaurant property,
retail improvements, and motorsports racetrack property expired on December 31, 2013, but they
have been extended repeatedly in the past and Congress could reinstate them.

The revenue impact of this tax expenditure represents the difference between the tax that would
be due under the 40-year period and the tax that is required under accelerated depreciation.

PURPOSE: The purpose of the deduction is to promote investment in buildings. In addition,
accelerated depreciation helps to offset any understatement of depreciation that results from use
of a historical cost basis to calculate depreciation, which does not account for inflation.

IMPACT: Owners of buildings that are used in a trade or business benefit from this provision.
The Congressional Research Service states that, The direct benefits of accelerated depreciation
accrue to owners of buildings, and particularly to corporations Benefits to capital income tend
to concentrate in the higher-income classes.
240

CRS adds that, Evidence suggests that the rate of economic decline of rental structures is much
slower than the rates allowed under current law, and this provision causes a lower effective tax
rate on such investments than would otherwise be the case. This treatment in turn tends to
increase investment in nonresidential structures relative to other assets, although there is
considerable debate about how responsive these investments are to tax subsidies.
241

240

241
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Income Tax
Deductions

81. Accelerated depreciation of equipment

Total
Total $7,893 $7,893 $7,893 $7,893

DESCRIPTION: This provision allows for accelerated depreciation of equipment as a deduction
from personal and corporate income tax. The standard method to calculate depreciation is the
straight-line method in which equal amounts are deducted in each period. Equipment is currently
divided into six categories that are depreciated over 3, 5, 7, 10, 15, and 20 years, respectively.
Accelerated depreciation allows for faster write-offs than the straight-line method, using methods
such as double declining balance depreciation, which permits taxpayers to apply twice the
straight-line depreciation rate to each years remaining undepreciated balance.

In addition, Congress and the President have periodically authorized bonus depreciation, which
allows a certain percentage of the cost of machinery and equipment to be deducted immediately.
Bonus depreciation was in effect under federal law, allowing a 100 percent deduction for
equipment placed into service from September 9, 2010, through the end of 2011, and permitting
50 percent expensing through the end of 2013. Nevertheless, in 2008 the District of Columbia
decoupled from the federal bonus depreciation rules (but not from the regular accelerated
depreciation rules described in the first paragraph), meaning that taxpayers could not include the
bonus provisions when calculating their District taxes and will not be able to do so in the future
if bonus depreciation is reauthorized.
242

Taxpayers who are eligible for another type of accelerated expensing of the cost of business
property (known as the Section 179 allowance) must calculate their section 179 deduction first
and then calculate any additional depreciation from the remaining basis.

PURPOSE: The purpose of this deduction is to promote investment in business machinery and
equipment. Proponents of accelerated depreciation contend that the value of machinery and
equipment declines faster in the early years, and that depreciation should follow the same pattern.

IMPACT: Owners of machinery and equipment used in a trade or business benefit from this
provision. The Congressional Research Service states that, The direct benefits of accelerated
depreciation accrue to owners of assets and particularly to corporations Benefits to capital
income tend to concentrate in the higher-income classes.
243

242
The statutory provision requiring decoupling was included in D.C. Law 17-219, the Fiscal Year 2009
Budget Support Act of 2008, which took effect on August 16, 2008. See Title VII-L of the Act.
243

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Page 132
CRS adds that, Evidence suggests that the rate of economic decline of equipment is much slower
than the rates allowed under current law, and this provision causes a lower effective tax rate on
such investments than would otherwise be the case. The effects of these benefits on investment
in equipment are uncertain, although more studies find equipment somewhat more responsive to
tax changes than they do structures. Equipment did not, however, appear to be very responsive to
the temporary expensing provisions adopted in 2002 and expanded in 2003.
244
Another risk is
that subsidies for machinery and equipment may encourage the substitution of capital for labor,
dampening employment growth.

The Center on Budget and Policy Priorities has urged states to decouple from the federal rules for
bonus depreciation, arguing that a substantial portion of the benefits flow to multi-state
corporations, which may spend the additional money out-of-state or simply increase their own
profit. CBPP also points out that the bonus depreciation provisions include no requirement or
incentive for a firm to buy machinery or equipment in state.
245

244

245
Ashali Singham and Nicholas Johnson, States Can Avert New Revenue Loss and Protect Their
Economies by Decoupling from Federal Expensing Provision, report issued by the Center on Budget and
Policy Priorities, April 14, 2011, p. 2.
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Income Tax
Deductions

82. Small life insurance company taxable income

Total

DESCRIPTION: Life insurance companies with gross assets of less than $500 million may take
a special deduction on taxable insurance income of as much as $15 million. Specifically, a small
life insurance company may deduct 60 percent of the first $3 million of taxable income. For life
insurance companies with taxable income between $3 million and $15 million, the deduction
equals $1.8 million minus 15 percent of the taxable income above $3 million.

PURPOSE: Although the purpose of the deduction is not clear from the legislative history, it
may have been intended to extend a policy of giving tax-favored treatment to small life insurance
companies that dates back to the early 20
th
century.
246
Policymakers may also have been
motivated by a desire to help small businesses and expand competition in the insurance market.

IMPACT: Small life insurance companies benefit from the deduction. The Congressional
Research Service points out that a company eligible for the maximum deduction of $1.8 million
(60 percent of the first $3 million in taxable income) is in effect taxed at a 13.6 percent rate
instead of the regular 34 percent corporate rate. CRS adds that, Determining how benefits for
the small life insurance company deduction are distributed is difficult because ownership of these
companies may be widely dispersed, either among shareholders in stock companies or
policyholders in mutual companies. Competitive pressures may force companies to pass some of
these benefits on to life insurance policyholders via lower premiums.
247

Nevertheless, CRS notes that the deduction violates economic principles and creates costs for
society as a whole. First, The principle of basing taxes on the ability to pay, often put forth as a
requisite of an equitable and fair tax system, does not justify reducing taxes on business income
for firms below a certain size.
248
In addition, Imposing lower tax rates on smaller firms distorts
the efficient allocation of resources, since it offers a cost advantage based on size and not
economic performance. This tax reduction serves no simplification purpose, since it requires an
additional set of computations and some complex rules to prevent abuses.
249

246

247

248

249
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Income Tax
Deductions

83. Amortization of business start-up costs

Corporate Income Tax Loss too small too small $58 $58
Total $139 $139 $139 $139

DESCRIPTION: This provision allows a taxpayer to deduct from personal or corporate taxable
income eligible start-up expenditures of up to $10,000 and to amortize any remaining amount
over 15 years. The deduction must be reduced on a dollar-for-dollar basis when the costs exceed
$60,000. Therefore, no deduction is allowable for a taxpayer with $70,000 or more of qualified
start-up expenditures.

Such expenditures must satisfy two requirements in order to be deducted. First, the expenditures
must be paid in connection with creating or investigating a trade or business before the taxpayer
begins an active business. Second, the expenditures must reflect costs that would be deductible
for an active business.

PURPOSE: The Congressional Research Service states that the deduction is intended to
encourage the formation of new firms that do not require substantial start-up costs by allowing a
large share of the costs to be deducted in the tax year when they begin to operate.
250

IMPACT: New businesses that incur start-up costs benefit from this provision. As CRS points
out, Benefits to capital income tend to concentrate in the higher income classes.
251
CRS also
observes that there are tax administration benefits both to start-up businesses and the IRS, stating
that, In theory, business start-up costs should be written off over the life of the business on the
grounds that they are a capital expense. Such a view, however, does pose the difficult challenge
of determining the useful life of a business at its outset. Section 195 has two notable advantages
as a means of addressing this challenge. First, it makes costly and drawn-out legal disputes
involving business taxpayers and the IRS over the tax treatment of start-up costs less likely.
Second, it does so at a relatively small revenue cost.
252

250

251

252
U.S. Senate, Committee on the Budget, pp 469-470.
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Income Tax
Deductions

84. Completed contract rules

Total $463 $521 $521 $521

DESCRIPTION: Some taxpayers with construction or manufacturing contracts extending for
more than one tax year are allowed to use the completed contract method of accounting. Under
this method, income and costs pertaining to the contract are reported when the contract is
completed; however, some indirect costs may be deducted from corporate and personal taxable
income in the year paid or incurred. This policy has been likened to giving taxpayers an interest-
free loan because the speeding up of deductions temporarily provides them with more money.

This deduction is limited to home construction contracts and to other real estate construction
contracts if they are in effect for less than two years and the contractors gross receipts for the
previous three years have averaged $10 million or less. The tax expenditure is the revenue loss
that results from deferring tax on the contracts covered by the rule, relative to the normal tax
treatment of such contracts (which is to capitalize indirect costs and report them at the same time
that the income from the contract is reported).

PURPOSE: The purpose of the deduction is to recognize the uncertainties involved in certain
contracts, which make it difficult to determine profit or loss until the contract is completed. IRS
rules authorized the completed contract method of accounting in 1918, but the use of this method
has since been restricted due to concern about perceived abuses by large contractors who were
using accrual accounting in their own financial statements (which showed that they could
estimate the profit or less before the contract was completed).

IMPACT: The Congressional Research Service states that, Use of the completed contract rules
allows the deferral of taxes through mismatching income and deductions because they allow
some costs to be deducted from income in the year incurred, even though the costs actually relate
to the income that will not be reported until the contracts completion, and because economic
income accrues to the contractor each year he works on the contract but it not taxed until the year
the contract is completed. Tax deferral is the equivalent of an interest-free loan from the
Government on the amount of the deferred taxes.
253
Although the deduction has minor
economic impact because it is now restricted to a very small segment of the construction industry,
CRS notes that it adds some tax advantage to an already heavily-favored construction sector.
254

253

254
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Income Tax
Deductions

85. Exception from passive loss rules for $25,000 of rental real estate
loss

Internal Revenue Code Section: 469(i)
Cl Total
Total $20,125 $22,711 $24,299 $26,813

DESCRIPTION: Taxpayers who own rental property and meet specific requirements can deduct
up to $25,000 in passive losses from their ordinary income. Passive gains and losses generally
arise from ventures such as limited or general partnerships, or other investment-oriented ventures,
in which the taxpayer does not actively participate.

Although passive-loss rules usually prohibit deducting rental property losses from income, this
tax expenditure involves an exception to those rules. To qualify for the deduction, the taxpayer
must play an active role in the rental process, own a stake of at least 10 percent in the property,
and have an adjusted gross income of less than $100,000 for a full deduction or $150,000 for a
partial deduction. Taxpayers with adjusted gross income of more than $150,000 cannot receive a
deduction.

PURPOSE: The limitations on passive-loss deductions were adopted in the Tax Reform Act of
1986 in order to reduce opportunities for tax sheltering. Many taxpayers had used passive losses
in real estate ventures, oil and gas operations, and farming businesses to offset wage, salary, and
active investment income. However, a partial exception for passive losses from rental real estate
was offered because, Congress believed that a limited measure of relief was appropriate in
the case of certain moderate-income investors in rental real estate, who otherwise might
experience cash flow difficulties with respect to investments that in many cases were designed to
provide financial security, rather than to shelter a substantial amount of other income.
255

IMPACT: Certain owners of rental real estate benefit from this provision. This exception to the
passive-loss rules may create economic distortions and efficiency losses. By extending a tax
preference to rental real estate investment, this provision may encourage overinvestment in the
real estate sector at the expense of other investments that would otherwise be more productive.
Although upper-income households are more likely to own rental properties, the income
restrictions curtail the benefits for high-income individuals.

255
U.S. Congress, Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986, JCS-
10-87 (Washington, D.C.: U.S. Government Printing Office, 1987), p. 230.
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Income Tax
Deductions

86. Expensing of depreciable small business property (Section 179
expensing allowance)

Personal Total
Total $5,505 $5,367 $5,367 $5,644

DESCRIPTION: In general, the cost of business property must be deducted from personal and
corporate income as it depreciates over its useful life. Section 179 expensing allows certain
businesses to deduct the full purchase price of qualified equipment, provided that the amount
deducted cannot exceed taxable income from the trade or business in which the property is used.
Qualified equipment generally includes new and used machinery, equipment, and off-the-shelf
computer software purchased for use in a trade or business. With several exceptions, real
property such as buildings and their structural components do not qualify for the deduction.

In recent years, section 179 expensing has been broadened for fixed time periods by federal laws
such as the Economic Stimulus Act of 2008 and the American Recovery and Re-Investment Act
of 2009. Most recently, the American Taxpayer Relief Act of 2012 set the maximum deduction
under section 179 as $500,000 for 2012 and 2013 and set an annual investment limit of $2
million. For each dollar of qualifying property that a taxpayer places in service above $2 million,
the maximum deduction under section 179 was reduced by one dollar. After tax year 2013, the
limit on expensing dropped back to $25,000, with an annual investment limit of $200,000.

In 2008, the District of Columbia decoupled from the increases to Section 179 expensing,
meaning that individuals and firms were not able to apply the higher expensing levels in
calculating their D.C. taxes.
256
The expensing limitation for D.C. taxes equals the lesser of
$25,000 (or $40,000 for a qualified high technology company) or the actual cost of the business
property during the year it was placed in service. If Congress restores higher section 179 levels,
the estimated revenue loss to the District from this tax expenditure will not reflect the increased
amounts.

Taxpayers who are eligible for other types of accelerated depreciation must calculate their section
179 deduction first and then apply any other deductions to the remaining basis.

Accelerated depreciation of any type of property does not change the cumulative amount of
depreciation allowed. Therefore, this provision allows a taxpayer to deduct more in the first year
of the investment and less in the later years of the capital life-cycle.

256
The statutory provision requiring decoupling was included in D.C. Law 17-219, the Fiscal Year 2009
Budget Support Act of 2008, which took effect on August 16, 2008. See Title VII-L of the Act.
________________________________________________________________________________________________

Page 138
PURPOSE: The expensing allowance, which has been modified and expanded many times since
its initial enactment in 1958, was intended to reduce the tax burden on small firms, give them an
incentive to invest more, and simplify their tax accounting, according to the Congressional
Research Service.
257

IMPACT: CRS states that, In the absence of section 179, the cost of qualified assets would have
to be recovered over longer periods. Thus, the provision greatly accelerates the depreciation of
relatively small purchases of those assets. This effect has significant implications for business
investment. All other things being equal, expensing boosts the cash flow of firms able to take
advantage of it, as the present value of taxes owed on the stream of income earned by a
depreciable asset is smaller under expensing than other depreciation schedules.
258
The lower
cost of capital and the resulting increase in cash flow are in turn intended to stimulate the
economy by spurring capital investment and employment.

CRS also points out that, (B)ecause the allowance has a phase-out threshold, its benefits are
confined to firms that are relatively small in asset, employment, or revenue size. Benefits to
capital income tend to concentrate in the higher income classes.
259

With regard to efficiency, CRS states that, Some argue that investment by smaller firms should
be supported by government subsidies because they create more jobs and develop and
commercialize more new technologies than larger firms. The evidence on this issue is
inconclusive. In addition, economic analysis offers no clear justification for targeting investment
tax subsidies at such firms. In theory, taxing the returns to investments made by all firms at the
same effective tax rate does less harm to social welfare than granting preferential tax treatment to
the returns earned by many small firms.
260

Another risk is that subsidies for machinery and equipment may encourage the substitution of
capital for labor, dampening employment growth.

257

258

259

260

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Income Tax
Deductions

87. Expensing of magazine circulation expenditures


DESCRIPTION: This provision allows publishers of periodicals to deduct expenditures to
establish, maintain, or increase circulation in the year that the expenditures are made. The
revenue impact of this tax expenditure is the difference between the current deduction of costs
and the recovery that would have been allowed if these expenses were capitalized and deducted
over time.

The expenditures that are eligible for deduction do not include purchases of land and depreciable
property, or the expansion of circulation through the purchase of another publisher or its list of
subscribers.

PURPOSE: According to the Congressional Research Service, Congress wanted to eliminate
some of the difficulties associated with distinguishing between expenditures to maintain
circulation, which had been treated as currently deductible, and those to establish or develop new
circulation, which had to be capitalized.
261
There had been numerous disputes between
publishers and the IRS, dating back to the late 1920s, about how to make this distinction.

IMPACT: Publishers of periodicals benefit from this provision, but the IRS also benefits from
the administrative simplification that results. CRS states that, Section 173 provides a significant
tax benefit for publishers in that it allows them to expense the acquisition of an asset that
seems to yield returns in more years than one. At the same time, it simplifies tax compliance and
accounting for them and tax administration for the IRS. Without such treatment, it would be
necessary for the IRS or Congress to clarify how to distinguish between expenditures for
establishing or expanding circulation and expenditures for maintaining circulation.
262

CRS adds that, Like many other business tax expenditures, the benefit tends to accrue to high-
income individuals.
263

261

262

263
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Income Tax
Deductions

88. Film and television production costs

Total

DESCRIPTION: Generally, the cost of producing films and television programs must be
depreciated over a period of time using the income forecast method, which allows deductions
based on the pattern of expected earnings. Nevertheless, companies are allowed to deduct
immediately the first $15 million of production costs (the amount rises to $20 million for films
and TV programs produced in designated low-income areas), provided that at least 75 percent of
the compensation associated with the project is for services performed in the United States. This
special provision represents a tax expenditure. Only the first 44 episodes of a TV program
qualify for this tax incentive, and sexually-explicit productions are not eligible.

This provision expired on December 31, 2013, but it has been extended several times before and
Congress could reinstate it. There will still be a small revenue loss in FY 2014-2017 as
deductions from prior tax years are claimed.

PURPOSE: According to the Congressional Research Service, the purpose of the deduction was
to discourage the runaway production of film and television production to other countries,
where tax and other incentives are often offered.
264

IMPACT: Film and TV producers benefit from this provision, because it allows for earlier
expensing of costs. CRS points out that, The benefit is greatest per dollar of investment for
those productions whose expected income is spread out over a long period of time and whose
production period is lengthy.
265
The cap on the amount that can be expensed focuses the
benefits on smaller productions. CRS adds that, In general, special subsidies to industries and
activities tend to lead to inefficient allocation of resources. Moreover, in the long run, providing
subsidies to counter those provided by other countries will not necessarily improve
circumstances, unless they induce both parties to reduce or eliminate their subsidies.
266
At the
same time, Given that tax subsidies cannot benefit firms that do not have tax liability, the scope
of this provision may be narrower than would be the case with a direct subsidy.
267

264

265

266

267
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Income Tax
Deductions

89. Gain on non-dealer installment sales

Internal Revenue Code Sections: 453 and 453A(b)
Total $6,809 $6,184 $5,709 $5,338

DESCRIPTION: People who do not deal regularly in selling property (non-dealers) are allowed
to report some sales of property for personal and corporate tax purposes under a special method
of accounting called the installment method. This method allows the taxpayer to pro-rate the
gross profit from the sale over a period in which payments are received. The taxpayer gets the
advantage of deferring some of the taxes to future years, rather than paying the taxes in full. The
tax expenditure is the difference between what the tax liability would be under year-of-sale
reporting and tax liability under installment reporting.

Non-dealers must pay interest to the government on the deferred taxes attributable to the portion
of the installment sales that arise during and remain outstanding at the end of the tax year in
excess of $5 million. A transaction with a sales price of less than $150,000 does not count toward
the $5 million threshold. Because the interest payments offset some of the value of the tax
deferral, the tax expenditure reflects only the revenue loss from transactions that give rise to
interest-free deferrals.

PURPOSE: The purpose of the deduction is to match the timing of tax payments to the timing of
the cash flow generated by the sale of the property. The Congressional Research Service points
out that, It has usually been considered unfair, or at least impractical, to attempt to collect the tax
when the cash flow is not available, and some form of installment sale reporting has been
permitted since at least the Revenue Act of 1921.
268

IMPACT: Infrequent sellers of property who sell on an installment basis benefit from this
provision. CRS notes that, The deferral of taxation permitted under the installment sale rules
essentially furnishes the taxpayer an interest-free loan equal to the amount of tax on the gain that
is deferred. CRS adds that, (T)he primary benefit probably flows to sellers of farms, small
businesses, and small real estate investments.
269

A fair method of taxing such property sales is difficult to structure. CRS states that, The
installment sales rules have always been pulled between two competing goals: taxes should not be
avoidable by the way a deal is structured, but they should not be imposed when the money to pay
them is not available. Allowing people to postpone taxes by taking a note instead of cash in a

268

269

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sale leaves obvious room for tax avoidance After having tried many different ways of
balancing these goals, lawmakers have settled on a compromise that denies the advantage to
taxpayers who would seldom have trouble raising the cash to pay their taxes (retailers, dealers in
property, investors with large amounts of sales) and permits its use to small, non-dealer
transactions (with small rather generously defined).
270

270

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Income Tax
Deductions

90. Life insurance company reserves

Internal Revenue Code Sections: 803(a)(2), 805(a)(2), and 807
Total $1,505 $1,563 $1,563 $1,621

DESCRIPTION: Life insurance companies can deduct net additions to their reserves and must
add net subtractions to their reserves when calculating income, subject to certain requirements set
forth in section 807 of the Internal Revenue Code. The ability to deduct the net additions to
reserves may allow life insurance companies to defer paying some taxes, thus reducing their tax
burden by allowing them to offset current income with future expenses. In most years, insurance
companies increase their reserves.

PURPOSE: The purpose of the deduction is to make tax rules consistent with standard industry
accounting practices. In the insurance industry, it is common practice to use some form of
reserve accounting in estimating net income.

Insurance companies have been allowed to deduct any additions to their reserves required by law
since the corporate income tax was adopted in 1909. Before Congress adopted the Deficit
Reduction Act of 1984 (P.L. 98-369), reserves were required by state law. Because Congress
concluded that state rules allowed for a significant overstatement of deductions, it established
federal rules for allowable reserves in the Deficit Reduction Act of 1984.

IMPACT: The Congressional Research Service observes that, When life insurance companies
can deduct additions to the reserve accounts when computing taxable income, they can purchase
assets using tax-free (or tax-deferred) income. Reserve accounting shelters both premium and
investment income from tax because amounts added to reserves include both premium income
and the investment income earned by the invested assets.
271

The benefits from the deduction may extend beyond the life insurance companies. CRS points
out that, Competition in the life insurance market could compel companies to pass along
corporate tax reductions to policyholders. Thus, this tax expenditure may benefit life insurance
consumers as well as shareholders of private stock insurance companies. For mutual life
insurance companies, policyholders may benefit either through lower insurance premiums, better
service, or higher policyholder dividends.
272

271

272
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Income Tax
Deductions

91. Loss from sale of small business corporation stock

Cl Total
Total $83 $83 $83 $83

DESCRIPTION: Taxpayers may deduct a loss on the sale or exchange of qualifying small
business corporation stock as an ordinary loss, rather than a capital loss. The deduction as an
ordinary loss is more valuable because ordinary income is taxed at a higher rate than capital
income.

A small business corporation is defined as having not more than $1 million in money and other
property received for its stock. For any taxable year, the aggregate amount that a taxpayer may
treat as an ordinary loss from the sale or exchange of small business corporation stock may not
exceed $50,000 for single filers or $100,000 for joint filers. This write-off is much greater than
the $3,000 deduction allowed for losses from the sale or exchange of other corporate stock.

PURPOSE: The purpose of the deduction is to encourage investment in small businesses.
Because small businesses are often unproven and have a high failure rate, the deduction may
encourage entrepreneurs to invest in small businesses by offering them some protection against
investment losses.

IMPACT: Individuals with losses from small business corporation stock benefit from this
provision, as do the small businesses that benefit from greater investment. Nevertheless, there
may be an efficiency loss associated with the deduction, because it channels resources (in the
form of tax relief) to businesses based on their size rather than on their productivity and ability to
respond to market forces.

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Income Tax
Deductions

92. Property and casualty insurance company reserves

Internal Revenue Code Section: 832(b)
Total $232 $232 $290 $290

DESCRIPTION: A property and casualty insurance companys taxable income during a tax year
is its underwriting income (i.e., premiums minus incurred losses and expenses) plus investment
income and certain other income items minus allowable deductions. Additions to loss reserves
held to pay future claims can also be deducted from taxable income under certain conditions.

The Tax Reform Act of 1986 imposed a 15 percent pro-ration provision, due to Congressional
concern that the use of tax-exempt investments to finance additions to loss reserves needed to be
regulated. Therefore, the allowable deduction for additions to loss reserves was reduced by 15
percent of the sum of (1) the insurers tax-exempt interest, (2) the deductible portion of dividends
received (with special rules for dividends from affiliates), and (3) the increase in the cash value of
life insurance, endowment or annuity contracts for the taxable year. Even with the 15 percent
reduction, property and casualty insurance companies are still able to shield a considerable
amount of income from taxation.

PURPOSE: The Congressional Research Service states that Congress adopted this provision
because members concluded it was not appropriate to fund loss reserves on a fully deductible
basis out of income which may be, in whole or in part, exempt from tax. The amount of the
reserves that is deductible should be reduced by a portion of such tax-exempt income to reflect
the fact that reserves are generally funded in part from tax-exempt interest or from wholly or
partially deductible dividends.
273

IMPACT: CRS observes that, The 15 percent pro-ration provision allows property and casualty
insurance companies to fund a substantial portion of their deductible reserves with tax-exempt or
tax-deferred income. Life insurance companies, banks and brokerage firms, and other financial
intermediaries, face more stringent proration rules that prevent or reduce the use of tax-exempt or
tax-deferred investments to fund currently deductible reserves or deductible interest expense.
Allowing property and casualty insurance companies an advantageous tax status, based on the
ability to use tax-exempt income to reduce tax liabilities, may allow those insurers to attract
economic resources from other sectors of the economy, thus creating economic inefficiencies.
Nevertheless, A more stringent allocation rule could reduce insurance companies demand for
tax-exempt bonds issued by state and local governments, which could raise financing costs for
those governments.
274

273

274
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Income Tax
Deductions

93. Research and development expenditures

Internal Revenue Code Section: 59 and 174
C
To(Dollars in thousands) FY 2014 FY 2015 FY 2016 FY 2017
Total $3,531 $4,052 $4,400 $4,515

DESCRIPTION: The Internal Revenue Code (IRC) offers several provisions that allow
immediate expensing or accelerated depreciation of research and development (R&D)
expenditures for the purposes of computing corporate and personal taxable income. This policy
stands in contrast to the tax treatment of other investments with long-term benefits, in which the
expenditures would be depreciated over the useful life of the asset.

In particular, section 174 of the IRC allows C corporations to deduct qualifying research
expenditures as a current expense, or to amortize these expenditures over 60 months beginning in
the month when the corporation first realizes benefits from the expenditures. Section 59 provides
another exception for all companies (pass-through entities as well as corporations) by allowing a
firm to amortize eligible research expenses over 10 years, starting in the tax year in which the
expenses are paid or incurred.

Expenditures for the acquisition or improvement of land and depreciable property used in
connection with research do not qualify for the research and development deductions. In
addition, a deduction claimed under section 174 must be reduced by the amount of any federal
research tax credit claimed under section 41 of the IRC.

PURPOSE: The purpose of the deductions is to encourage investment in R&D, and to avoid the
difficulty of determining the useful life of any asset created through the research and development
process. Many economists contend that society as a whole will underinvest in R&D because
private organizations and individuals do not account for the spillover benefits to society when
they make decisions to pursue R&D. Therefore, it may be appropriate for the government to
encourage greater expenditure on R&D in order to realize its full benefits.

IMPACT: Firms with qualified research and development expenditures benefit from this
provision. The Congressional Research Service states that, The main beneficiaries of the (R&D
deduction) are larger manufacturing corporations primarily engaged in developing, producing,
and selling technically advanced products. As a corporate tax deduction, the benefits of
expensing any capital cost are likely to accrue mainly to upper-income individuals.
275

Nevertheless, there may be broader benefits to society because the deductions can reduce the
market failure that occurs when firms ignore the spillover benefits of research and development
when making their investment decisions.

275

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CRS adds that, Critics of federal tax incentives for innovation maintain that the main flaw with
section 174 is that it does not target its inventive effect at R&D investments that are likely to
generate social returns that far exceed the private returns.
276

276
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Income Tax
Deductions

94. Amortization of certified pollution control facilities

Internal Revenue Code Sections: 169(d)(5)
Total
Total $232 $174 $174 $174

DESCRIPTION: Coal-fired electric generation plants that invested in pollution control
equipment placed in service after April 11, 2005, are eligible to amortize the costs over a seven-
year period. This rule applies only to plants that began operation on or after January 1, 1976.

Plants that began operating before January 1, 1976, are eligible for five-year amortization if the
pollution control equipment has a useful life of 15 years or less.

Both sets of rules (those applying to pre-1976 plants and to post-1975 plants) represent a tax
expenditure because they allow for faster depreciation than the 15- or 20-year period (depending
on the type of equipment) that would ordinarily be allowed under the modified accelerated cost
recovery system, which sets the standard rules for depreciation.

Qualifying pollution control equipment refers to any technology, such as a scrubber system, that
is installed by a qualifying facility to reduce the air emissions of any pollutant regulated by the
U.S. Environmental Protection Agency under the Clean Air Act.

PURPOSE: According to the Congressional Research Service, the accelerated depreciation for
pollution control equipment targets electric utilities, a major source of air pollution The
incentive will facilitate utilities in meeting a new suite of EPA mandates to reduce emissions of
sulfur dioxide (SO
2
), nitrous oxide (NO
2
), and mercury (Hg).
277

IMPACT: CRS observes that, Because of the time value of money, the earlier deduction is
worth more in present value terms, which reduces the cost of capital and the effective tax rates on
the investment returns. This should provide an incentive for power plant companies to invest
in pollution control equipment.
278
At the same time, CRS notes a possible perverse consequence
of this subsidy, stating that, The Clean Air Acts New Source Review provisions require the
installation of state-of-the-art pollution-control equipment whenever an air-polluting plant is built
or when a major modification is made on an existing plant. By creating a more favorable (in
some cases much more favorable) regulatory environment for existing facilities than new ones,
grandfathering creates an incentive to keep old, grandfathered facilities up and running.
279

277

278

279
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Income Tax
Deductions

95. Depreciation recovery periods for specific energy property

Internal Revenue Code Sections: 168(e)
Total
Total $463 $521 $463 $463

DESCRIPTION: Federal law allows more rapid depreciation of certain types of tangible energy
property than would otherwise be allowed under the modified accelerated cost recovery system,
which sets the standard rules for depreciation. The accelerated depreciation of specific types of
energy property, described in the next paragraph, represents a tax expenditure.

The recovery period for certain renewable energy equipment, including solar, wind, geothermal,
fuel cell, combined heat and power, and microturbine property is five years. Renewable energy
generation property that is part of a small electric power facility and certain biomass property
are also depreciated over five years. Natural gas gathering lines are subject to seven-year
depreciation if the original use began after April 11, 2005. A qualified smart meter or smart
electric grid system has a recovery period of 10 years. Finally, certain electric transmission
property and natural gas distribution lines placed in service after April 11, 2005, are depreciated
over 15 years.

PURPOSE: According to the Congressional Research Service, a detailed legislative history for
these provisions is lacking, but the rationale was presumably to encourage alternative energy
sources that are less polluting than conventional fuels.
280

IMPACT: Commercial property owners who purchase the energy property listed above benefit
from the tax subsidy, but there may be efficiency costs to society. CRS points out that,
Economic theory suggests that capital investments should be treated in a neutral fashion to
maximize economic efficiency. Permanent investment subsidies, such as accelerated
depreciation, may distort the allocation of capital in the long run.
281
Nevertheless, externalities
such as the pollution associated with conventional fossil fuels may justify a tax subsidy for
alternative energy sources. CRS also observes that, Economic efficiency may be enhanced by
taxing energy sources believed to impose negative external costs, rather than subsidizing
renewable alternatives.
282

280

281

282
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Income Tax
Deductions

96. Energy-efficient commercial building property

Internal Revenue Code Section: 179D
Total $173 $173 $173 $173

DESCRIPTION: A deduction was available for all or part of the expenditures on energy-efficient
commercial property occurring after December 31, 2005, and before January 1, 2014. The
deduction was based on a formula with a maximum of $1.80 per square foot of commercial
building space. This tax expenditure is projected to create costs after FY 2014 because (1)
taxpayers can amend their returns in subsequent years to claim the deduction, and (2) the credit
could create a net operating loss that could be carried forward into future years.

The deduction is reduced by any amount deducted in prior years (in other words, the limit of
$1.80 per square foot is cumulative rather than annual). In addition, depreciation may not be
claimed on any amount that is deducted under this provision.

A licensed professional engineer or contractor must provide the taxpayer with a certificate stating
that the energy-saving improvements reduce the total energy and power costs of the buildings
heating, cooling, ventilation, hot-water, and interior lighting systems by at least 50 percent of the
costs associated with a similar reference building. If the overall 50 percent reduction standard
is not met, a limited deduction of up to 60 per square foot is available for improvements to the
heating, cooling, ventilation, hot-water, or interior lighting systems.

PURPOSE: The purpose of the deduction is to promote energy efficiency by encouraging
businesses to retrofit their buildings with energy-conserving equipment. The commercial sector
in the United States uses almost as much energy as the residential sector but has generally not
been the target of energy conservation incentives.
283
The Energy Tax Act of 1978 targeted the
industrial energy sector, but the tax credits authorized by the law expired.

IMPACT: Businesses that make investments in energy-efficient property are the direct
beneficiaries of the deduction. The Congressional Research Service points out that, Allowing a
current deduction for energy-efficient capital goods that would otherwise be depreciated over (39
years) greatly accelerates, and increases the present value of, the deductions.
284

Spillover benefits to society offer a possible justification for the deduction. CRS notes that, (I)f
consumption of energy results in negative effects on society, such as pollution, the deduction
might be justified. In general, however, it would be more economically efficient to directly tax

283

284
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energy fuels than to subsidize a particular method of achieving conservation.
285
In addition,
CRS notes that there may be market failures in energy conservation for commercial property that
is leased; both landlord and tenant may underinvest in energy conservation equipment because
each party is not sure that it will realize the savings needed to offset the up-front cost.
286
The tax
deduction may help correct the market failure.

285

286
U.S. Senate, Committee on the Budget, p. 117. For example, the tenant might not occupy the property
long enough to realize the benefits, while the landlord might not be certain if the tenant will properly or
consistently use the energy-saving equipment in order to generate the required level of savings.
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Income Tax
Deductions

97. Blue Cross and Blue Shield companies

Total
Total $232 $232 $232 $290

DESCRIPTION: Blue Cross and Blue Shield and other smaller health insurance providers which
operated on August 16, 1986, as well as other non-profit health insurers that meet certain
community service and medical loss ratio standards, qualify for special tax treatment. A medical
loss ratio (MLR) equals total health benefits paid divided by premium income, and is used as an
indicator of profitability and administrative efficiency.

This deduction has two main features. First, Blue Cross/Blue Shield and other eligible health
insurers are allowed to fully deduct unearned premiums,
287
unlike other property and casualty
insurance companies (which is how Blue Cross/Blue Shield and the other insurers are classified
under tax law). Second, Blue Cross/Blue Shield and the other insurers may deduct 25 percent of
the years health-related claims and expenses minus their accumulated surplus at the beginning of
the year. The special deductions apply only to net taxable income for the year and cannot be used
in alternative minimum tax calculations. The Patient Protection and Affordable Care Act of 2010
now requires the insurers to maintain an MLR of 85 percent in order to claim the deduction.

PURPOSE: In the Tax Reform Act of 1986, Congress repealed a tax exemption that Blue
Cross/Blue Shield had enjoyed since the 1930s, after finding that the company was engaged in
inherently commercial activities and that its tax-exempt status provided an unfair competitive
advantage. At the same time, Congress enacted the special deduction to recognize the role of
Blue Cross/Blue Shield and other health insurers in providing insurance to high-risk, small
groups,
288
which is more risky and expensive.

IMPACT: Although the preferential tax treatment presumably benefits Blue Cross/Blue Shield,
the other insurers, and the people who receive the insurance, the Congressional Research Service
notes that the insurers have moved away from their traditional role of covering smaller, high-risk
groups. As a result, Some have argued that these tax preferences have benefited their managers
and their affiliated hospitals and physicians more than their communities.
289

287
An unearned premium refers to an insurance premium that has been collected in advance by an
insurance company, but must be returned to the client if the coverage ends before the term covered by the
insurance is complete (if the client exercises an option to cancel, for example).

288

289
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Income Tax
Deductions

98. Medical and dental care expenses

Total
Total $10,069 $11,531 $13,155 $14,048

DESCRIPTION: Taxpayers who itemize their deductions can deduct from their taxable personal
income any medical and dental expenses in excess of a certain percentage of adjusted gross
income (AGI). For taxpayers under age 65, that threshold rose from 7.5 percent to 10 percent of
AGI in 2013. For taxpayers age 65 or over, the threshold remains at 7.5 percent of AGI but will
increase to 10 percent in 2016. The deduction includes amounts that are paid for health
insurance, and covers the medical expenses of the taxpayer, his or her spouse, and dependents.

PURPOSE: The purpose of the deduction is to compensate for large medical bills that are viewed
as involuntary and therefore reduce an individuals ability to pay taxes. Still, the Congressional
Research Service observes that, (T)he deduction is not limited to strictly involuntary expenses.
It also covers some costs of preventive care, rest cures, and other discretionary expenses.
290

IMPACT: CRS states that low- to middle-income households claim a large share of the benefits
of the deduction because, Lower-income taxpayers have relatively low rates of health insurance
coverage, because they cannot afford health insurance coverage or their employers do not offer it.
As a result, many of these taxpayers are forced to pay out of pocket for the health care they and
their immediate families receive. In addition, medical spending constitutes a larger fraction of
household budgets among low-income taxpayers than it does among high-income taxpayers,
making it easier for low-income taxpayers to exceed the AGI threshold.
291

CRS also observes that the deduction does not establish horizontal equity among those who
receive employer-sponsored health care and those who pay for health care costs out of pocket
because, Employer-paid health care is excluded from income and payroll taxes, whereas the cost
of health insurance bought in the non-group market can be deducted from taxable income only to
the extent it exceeds 7.5 or 10 percent of AGI.
292

290

291

292
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Income Tax
Deductions

99. Accelerated depreciation of rental housing

Total $5,045 $4,918 $4,918 $5,021

DESCRIPTION: Rental housing that was placed in service after 1986 benefits from accelerated
depreciation that is calculated on a straight-line basis over 27.5 years. This tax expenditure
measures the revenue loss due to the rental housing deductions in excess of those allowed under
the 40-year straight-line depreciation allowed under the alternative minimum tax.

Rental housing that was placed in service before 1986 continues to depreciate according to the
method in effect when it came on the market, which may allow the property to depreciate faster
than under a straight-line method.

PURPOSE: The purpose of accelerated depreciation is to promote investment in rental housing
by effectively deferring taxes paid on such investment.

IMPACT: The Congressional Research Service states that, The direct benefits of accelerated
depreciation accrue to owners of rental housing. Benefits to capital income tend to concentrate in
the higher-income classes.
293

With regard to the economic impact of accelerated depreciation, CRS notes that, Evidence
suggests that the rate of economic decline of residential structures is much slower than the rates
allowed under current law, and this provision causes a lower effective tax rate on such
investments than would otherwise be the case. This treatment in turn tends to increase investment
in rental housing relative to other assets, although there is considerable debate about how
responsive these investments are to tax subsidies.
294

In addition, Much of the previous concern about the role of accelerated depreciation in
encouraging tax shelters in rental housing has faded because the current depreciation provisions
are less rapid than those previously in place, and because there is a restriction on the deduction of
passive losses.
295

293

294

295
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Income Tax
Deductions

100. Mortgage interest on owner-occupied residences

Internal Revenue Code Section: 163(h)
Total $68,651 $71,811 $75,832 $83,684

DESCRIPTION: Taxpayers may take an itemized deduction for interest paid on debt secured by
a principal or second residence. Although some restrictions apply, most taxpayers can deduct the
full amount of their mortgage interest. Mortgage interest is deductible on up to $1 million of debt
used to buy, build, or improve a principal or second residence, plus home equity indebtedness of
up to $100,000. The sum of the acquisition indebtedness and home equity debt cannot exceed the
fair market value of the home.

The deduction is considered a tax expenditure because homeowners are allowed to deduct their
mortgage interest even though the implicit rental income from the home (the money they could
earn by renting to someone else) is not subject to tax. There were no limits on the home
mortgage interest deduction until the current restrictions were enacted in 1986 and 1987.

PURPOSE: The home mortgage interest deduction was part of a larger deduction for all interest
paid that was established when the personal income tax was first enacted in 1913. The
Congressional Research Service states that, There is no evidence in the legislative history that
the interest deduction was intended to encourage home ownership or to stimulate the housing
industry at that time.
296

Proponents of the deduction contend that it encourages homeownership, which in turn is seen as a
way to encourage neighborhood stability and civic responsibility by giving people a stronger
stake in their communities.

IMPACT: In 2011, 80,466 District tax filers claimed the mortgage interest deduction. Taxpayers
with federal adjusted gross income of $100,000 or more comprised 49 percent of the beneficiaries
and claimed 64 percent of the total amount deducted.
297
CRS reports that the households with
annual income of $100,000 or more also claimed the bulk (78 percent) of the benefits
nationwide.
298
Higher-income households can afford to spend more on housing and can qualify
to borrow more.

296

297

298
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Page 156
Urban Institute researchers also point out that the mortgage interest deduction is not a cost-
effective tool for increasing homeownership because its main beneficiaries are not individuals on
the margin between renting and owning. The deduction is available only to itemizing taxpayers
and its value rises with an individuals tax rate.
299
As a result, eliminating the deduction would
reduce after-tax income by the largest percentage for those in the 80
th
to 99
th
percentiles of the
income distribution (those in the top 1 percent would not lose as much because their mortgage
costs are lower as a percentage of income).
300

With regard to economic efficiency, CRS states that, The preferential tax treatment of owner-
occupied housing relative to other assets is also criticized for encouraging households to invest
more in housing and less in other assets that might contribute more to increasing the Nations
productivity and output.
301
Nor is the deduction necessarily effective in promoting
homeownership. According to CRS, (T)he rate of homeownership in the United States is not
significantly higher than in countries such as Canada that do not provide a mortgage interest
deduction under their income tax. The value of the U.S. deduction may be at least partly
capitalized into higher prices at the middle and upper end of the market.
302

The home mortgage interest deduction also impairs horizontal and vertical equity. Renters do not
receive a comparable tax benefit. Landlords may deduct mortgage interest paid for rental
properties, but must pay tax on the rental income (homeowners dont pay any tax on the imputed
rental value of their homes). Finally, many elderly individuals do not have home mortgages (they
own their homes outright) and therefore do not benefit from the mortgage interest deduction.
303

299
Eric Toder, Margery Austin Turner, Katherine Lim, and Liza Getsinger, Reforming the Mortgage
Interest Deduction, April 2010 (available at www.urban.org), p. 3.

300
Toder, Turner, Lim, and Getsinger, p. 16.

301

302

303
Richard Green, Mortgage Interest Deduction, in The Encyclopedia of Taxation and Tax Policy,
Joseph Cordes, Robert Ebel, and Jane Gravelle, eds. Washington, D.C.: The Urban Institute Press, 2005),
p. 260.
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Income Tax
Deductions

101. State and local property taxes on owner-occupied residences

Total $17,158 $18,238 $19,498 $20,638

DESCRIPTION: Taxpayers may take an itemized deduction for real estate taxes paid on an
owner-occupied residence.

PURPOSE: When the U.S. personal income tax was first enacted in 1913, all federal, state, and
local taxes were deductible, based on the premise that tax payments reduce disposable income
and therefore should not be included in a measure of the taxpayers ability to pay. Today,
proponents argue that the deduction promotes fiscal federalism by helping state and local
governments raise revenue to support public services.

IMPACT: In 2011, 85,961 District tax filers claimed the deduction for property taxes paid.
Taxpayers with federal adjusted gross income of $100,000 or more comprised 51 percent of the
claimants and accounted for 71 percent of the total amount deducted.
304

As stated by the Congressional Research Service, Like all personal deductions, the property tax
deduction provides uneven tax savings per dollar of deduction. The tax savings are higher for
those with higher marginal tax rates, and those homeowners who do not itemize deductions
receive no direct tax savings on property taxes paid. Higher-income groups are more likely to
itemize property taxes and to receive larger average benefits per itemizing return. Consequently,
the tax expenditure benefits of the property tax are concentrated in the upper-income groups.
305

CRS adds that the deduction is not an economically efficient way to provide federal aid to state
and local governments in general, or to target aid on particular needs, compared with direct aid.
The deduction works indirectly to increase taxpayers willingness to support higher state and
local taxes by reducing the net price of those taxes and increasing their income after federal
taxes.
306
A counter-argument is that state and local governments may underinvest in
infrastructure or services that spill over beyond their borders; the deduction for state and local
taxes may help correct that underinvestment.

304

305

306

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A possible unintended consequence is that, (T)he value of the property tax deduction may be
capitalized to some degree into higher prices for the type of housing bought by taxpayers who can
itemize.
307
Like the mortgage interest deduction, the property tax deduction may also impair
horizontal and vertical equity. Renters cannot deduct their rent payments from the federal income
tax. Landlords are able to deduct the property taxes on their rental properties but must pay tax on
the rental income (homeowners dont pay any tax on the imputed rental value of their homes).

President Bush Advisory Panel on Federal Tax Reform called for repeal of deductions for state
and local taxes, arguing that, (T)hese expenditures should be treated like any other
nondeductible personal expense, such as food or clothing, and that the cost of these services
should be borne by those who want them not by every taxpayer in the country As with many
other tax benefits, the state and local tax deduction requires higher tax rates for everyone, but the
benefits of the deduction are not shared equally among taxpayers.
308

307

308
The Presidents Advisory Panel on Federal Tax Reform, pp. 83-84.
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Income Tax
Deductions

102. Casualty and theft losses

Internal Revenue Code Section: 165(c)(3), 165(e), 165(h) - 165(k)
CTotal
Total $142 $142 $142 $142

DESCRIPTION: Taxpayers who itemize deductions may subtract from taxable income their non-
business casualty and theft losses that are not reimbursed through insurance, subject to the
following limitations: (1) total losses during the tax year must exceed 10 percent of adjusted gross
income, and (2) losses must exceed $100 per event in order to be counted. Eligible losses include
those arising from fire, storm, shipwreck or other casualty, or from theft. Congress has removed
the 10 percent of AGI threshold and the $100 per-event threshold for calamities such as
Hurricanes Katrina, Wilma, and Rita.

PURPOSE: The purpose of the deduction is to reduce the tax burden for those who experience
large casualty and theft losses. The $100 floor per-event, which was established in 1964, was
intended to reduce the number of small and often improper claims, reduce the costs of record-
keeping and audits, and focus the deduction on extraordinary losses.
309

IMPACT: As stated by the Congressional Research Service, The deduction grants some
financial assistance to taxpayers who suffer substantial casualties and itemize deductions. It
shifts part of the loss from the property owner to the general taxpayer and thus serves as a form of
government coinsurance. Use of the deduction is low for all income groups.
310

The benefits may be tilted toward more affluent taxpayers because a dollar of deductible losses is
worth more to those with higher marginal tax rates,

and because the deduction is available only
to those who itemize.

Finally, the deduction may protect people who failed to purchase insurance at the expense of
those who did. CRS further points out that, It similarly discriminates against people who take
preventive measures to protect their property but cannot deduct their expenses. No distinction is
made between loss items considered basic to maintaining the taxpayers household and livelihood
versus highly discretionary personal consumption.
311

309

310

311
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Income Tax
Deductions

103. Deduction of foreign taxes instead of a credit

Total
Total $174 $174 $174 $174

DESCRIPTION: Taxpayers may elect to claim a deduction against taxable income or a credit
against taxes due for any taxes paid on income that was earned abroad. Generally, the credit is
more advantageous than the deduction because the credit reduces taxes on a dollar-for-dollar
basis, whereas the deduction only reduces the amount of income subject to taxation.
Nevertheless, if the taxpayer has reached the foreign tax credit limit, then he or she will benefit
from claiming the deduction, which also represents a tax expenditure.

PURPOSE: According to the Congressional Research Service, the rationale for this almost 100-
year-old deduction might have been to recognize foreign taxes, like state taxes, as a possible cost
associated with earning income. As such, the provision would help correct for mismeasurement
of adjusted gross income and be justified on ability to pay or horizontal equity arguments.
312

IMPACT: The deduction benefits those taxpayers who are either unable to claim to foreign tax
credit or who have reached the foreign tax credit limit. CRS points out that, This results in the
foreign return net of foreign tax equaling the domestic before-tax return and a nationally efficient
allocation of capital. While this maximizes the income or output in the domestic market, it also
alters the division of income between capital and labor, shifting income towards labor and away
from capital. Because national neutrality distorts the location of investment, it produces an
inefficient deadweight reduction in world economic welfare.
313

312

313
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Income Tax
Deductions

104. Financing income of certain controlled foreign corporations


DESCRIPTION: Under the U.S. method of taxing overseas investment, income earned abroad by
foreign-chartered subsidiary corporations that are owned and controlled by U.S. investors or firms
is generally not taxed if it is reinvested abroad. Instead, U.S. taxes are deferred until the income
is repatriated to the U.S. parent firm as dividends or other income.

Subpart F of the U.S. Internal Revenue Code disallows the deferral of tax on foreign income by
certain firms known as controlled foreign corporations.
314
In general, the types of income that
fall under subpart F and are therefore subject to current taxation include passive investment, such
as interest, dividends, and gains from the sale of stock and securities, as well as certain types of
income whose geographic source is thought to be shifted easily.

Ordinarily, income from banking and insurance would often be covered by Subpart F and
therefore subject to immediate taxation. Nevertheless, Congress provided a temporary exception
from Subpart F for income derived in the active conduct of a banking, financial, or similar
business, and for the investment income of an insurance company earned on risks located in its
country of incorporation. These exceptions to Subpart F constitute a tax expenditure. This
provision expired on December 31, 2013, but there will still be a revenue loss for FY 2014.
Moreover, Congress has repeatedly extend this tax expenditure, and could act to reinstate it.

PURPOSE: According to the Congressional Research Service, Subpart F was enacted in 1962 to
curtail the use of tax havens by U.S. investors who sought to accumulate funds in countries with
low tax rates hence Subpart Fs emphasis on passive income and income whose source can be
manipulated.
315
The stated rationale for the banking and insurance exception from Subpart F
was that, (I)nterest, dividends, and like income were not thought to be passive income in the
hands of banking and insurance firms.
316

IMPACT: U.S. firms conducting financial business abroad benefited from this provision. CRS
notes that, (B)anks and insurance firms present an almost insoluble technical problem in the

314
A controlled foreign corporation is a firm that is at least 50 percent owned by U.S. stockholders, each
of whom owns at least 10 percent of the corporations stock.

315

316

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implementation of Subpart F because, (T)he types of income generated by passive investment
and income whose source is easily manipulated are also the types of income financial firms earn
in the course of their active business. The choice confronting policymakers, then, is whether to
establish an approximation that is fiscally conservative or one that places most emphasis on
protecting active business income from Subpart F.
317

More generally, tax incentives for investment abroad can reduce economic efficiency both for the
capital-exporting country (the U.S. in this case) and the world economy. CRS states that,
Economic theory instead recommends a policy known as capital export neutrality under which
marginal investments face the same tax burden at home and abroad. From that vantage, then, the
exceptions to Subpart F likewise impair efficiency.
318

317

318

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Income Tax
Deductions

105. Charitable contributions

Internal Revenue Code Sections: 170 and 642(c)
Year Enacted in Federal Law: 1917 (individuals) and 1935 (corporations)
Total $55,257 $57,684 $60,209 $63,107

DESCRIPTION: Subject to certain limitations, charitable contributions may be deducted by
individuals, corporations, estates, and trusts. The contributions must be made to religious,
educational, or scientific institutions; public charities; non-profit hospitals; and federal, state, or
local governments. Only individuals who itemize their deductions can claim this deduction.

Individuals may deduct charitable contributions of as much as 50 percent of gross income (30
percent for gifts of capital gain property). Corporations may deduct charitable contributions up to
15 percent of adjusted taxable income.
319
Contributions made in the form of property are subject
to different rules depending on the type of donor, recipient, and purpose.

PURPOSE: According to the Congressional Research Service, the deduction was originally
established for individual taxpayers during World War I in response to concern that high wartime
tax rates would curtail charitable contributions.
320
The deduction was extended to corporations in
1935. Proponents argue that the deduction for private donations reduces demand for government
services, and that the services provided by voluntary, non-profit organizations may be more
efficient and better tailored to peoples needs than public services.

IMPACT: In 2011, 107,122 District tax filers claimed this deduction. Those with federal
adjusted gross income (AGI) of less than $100,000 comprised 56 percent of the claimants, but
accounted for only 30 percent of the total amount deducted. Those with federal AGI of $200,000
or more comprised only 17 percent of claimants, but accounted for 54 percent of the total amount
deducted.
321

The unavailability of the deduction to taxpayers who claim the standard deduction is one reason
why the benefits of the charitable contribution deduction are tilted to higher-income individuals.
In addition, the higher marginal tax rates faced by higher-income taxpayers mean that each dollar

319
The District departs from federal practice on this issue, which is to cap charitable contributions for
corporations at 10 percent of taxable income, rather than 15 percent as in the District. See D.C. Official
Code 47-1803.03(a)(8).

320

321

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Page 164
they deduct translates into a larger reduction in tax. To make the deduction more equitable,
President Bushs Advisory Panel on Federal Tax Reform proposed making it available to all
taxpayers who contribute more than 1 percent of their income to charity, regardless of whether
they itemize their deductions.
322

CRS states that households at the lower end of the income scale are more likely to claim
deductions for donating to religious institutions, whereas higher-income households are more
likely to claim deductions for giving to hospitals, the arts, and educational institutions.
323

Society may benefit from the deduction because it supports activities, such as education and
scientific innovation, which can have large spillover effects. Jon Bakija of Williams College and
Bradley Heim of the U.S. Treasury Department found that the estimated permanent price
elasticity of charitable giving is about -0.7 and is higher for high-income individuals. As a result,
they conclude there is fairly robust evidence that charitable giving is fairly responsive to
persistent changes in tax incentives.
324
On the other hand, CRS notes that the deduction may
allow wealthy taxpayers to indulge special interests and hobbies. To the extent that charitable
giving is independent of tax considerations, federal revenues are lost without having provided any
additional incentive for charitable gifts.
325

William Randolph of the U.S. Treasury Department points out that a deduction may not be the
most effective to way to promote charitable giving because, An efficient subsidy would vary
with the amount of external benefits, whereas the tax subsidy rate provided by a charitable
deduction varies only with the givers tax rate Some argue that a tax credit would be a fairer
and more efficient form of subsidy because the subsidy rate would not depend as much on the
givers level of income.
326
Moreover, researchers at the Center on Philanthropy at Indiana
University have found that economic growth plays a more important role in spurring charitable
giving than do changes in tax rates or preferences.
327

322
Presidents Advisory Panel on Federal Tax Reform, pp. 75-76.

323

324
Jon Bakija and Bradley Heim, How Does Charitable Giving Respond to Incentives and Income?
Dynamic Panel Estimates Accounting for Predictable Changes in Taxation, National Bureau of Economic
Research Working Paper 14237, August 2008, p. 41.

325

326
William Randolph, Charitable Deductions, in The Encyclopedia of Taxation and Tax Policy, Joseph
Cordes, Robert Ebel, and Jane Gravelle, eds. Washington, D.C.: The Urban Institute Press, 2005), p. 52.

327
The Center on Philanthropy at Indiana University, How Changes in Tax Rates Might Affect Itemized
Charitable Deudctions (March 2009), research paper available at www.philanthropy.iupui.edu.
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Income Tax
Deductions

106. Costs of removing architectural and transportation barriers to the
disabled and elderly


DESCRIPTION: Business taxpayers may deduct up to $15,000 in annual expenses for the
removal of physical barriers to the elderly or persons with disabilities in qualified facilities or
public transportation vehicles that the taxpayer owns or leases. The tax expenditure associated
with this deduction reflects the additional tax savings from the deduction, relative to the regular
depreciation rules that would otherwise apply.

Costs associated with constructing a new facility or vehicle, or undertaking a complete renovation
of an existing facility to make it more accessible to the elderly or persons with disabilities, do not
qualify for the deduction. In the case of a partnership, the $15,000 limit applies separately to the
partnership and its individual members.

PURPOSE: According to the Congressional Research Service, the likely goal of the deduction
was to engage the private sector in expanding employment opportunities and improving access
to goods and services for the elderly and disabled. Supporters of the provision have long
contended that without it, most firms would be unlikely to remove physical barriers to the elderly
and disabled from their facilities and transport systems.
328

IMPACT: CRS states that, Like all accelerated depreciation allowances, the provision defers a
small portion of the tax on any income earned by firms making the requisite improvements. In
effect, the provision increases the present value of the depreciation allowances a firm may claim
for making the eligible investment.
329

CRS questions the impact of the deduction because, It is not even clear from the business tax
data published by the Internal Revenue Service to what extent firms have taken advantage of the
section 190 expensing allowance. No studies of the efficacy of the allowance appear to have
been done Because the allowance covers only a fraction of the expenses a firm incurs in
accommodating the needs of disabled employees, it can be argued that its incentive effect is too
small to have much of an impact on employment levels for the disabled.
330

328

329

330
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Income Tax
Special Rules

107. 60-40 rule for gain or loss from section 1256 contracts

Tota
Corporate Income Tax Loss too small $58 $58 $58
Total $142 $200 $200 $200

DESCRIPTION: A section 1256 contract is any regulated futures contract, foreign currency
contract, non-equity option, dealer equity option, or dealer securities futures contract that is
traded on a qualified board of exchange with a mark-to-market accounting system. Under a
mark-to-market system, gains and losses must be reported on an annual basis for tax purposes.

A tax expenditure arises under section 1256 contracts because the capital gain or loss from
applicable contracts are treated as consisting of 60 percent long-term and 40 percent short-term
gain or loss, regardless of how long the contract is held. The 60-40 rule removes the one-year
holding period requirement for long-term capital gains tax treatment, allowing some gains to be
taxed at a lower rate.

The 60-40 rule does not apply to hedging transactions, which are transactions done by a
business in its normal operation with the primary purpose of reducing risks, or to limited
partnerships.

PURPOSE: According to the Congressional Research Service, the mark-to-market method of
valuing futures contracts was established to overcome the tax sheltering impact of certain
commodity futures trading strategies and to harmonize the tax treatment of commodities futures
contracts with the realities of the marketplace under what Congress referred to as the doctrine of
constructive receipt.
331

IMPACT: The mark-to-market accounting for section 1256 contracts eliminates the deferral that
would result under usual tax rules that recognize gains only when they are realized, rather than
when they accrued. At the same time, this accounting method removes the one-year holding
requirement for long-term capital gains treatment, conferring a benefit to the owners of these
assets. According to CRS, this special rule often results in lower taxes for traders.
332

331

332
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Income Tax
Special Rules

108. Interest rate and discounting period assumptions for reserves of
property and casualty insurance companies

Internal Revenue Code Sections: 831, 832(b), and 846
Tota
Total $463 $463 $463 $463

DESCRIPTION: Property and casualty insurance companies may gain a tax advantage from the
rules for calculating the present value of future losses. A present value is the current equivalent
value of a given cash flow, and is calculated using interest rates or discount factors and
information about the timing of income and losses. Most businesses calculate taxable income by
deducting expenses when the business becomes liable for paying them. However, property and
casualty companies pay out a significant portion of losses years after premiums were collected.
Therefore, it is necessary to discount losses in future years to prevent the insurer from gaining a
tax advantage from deferring loss payments.

Each year, the U.S. Treasury Department specifies discount factors for various lines of property
and casualty insurance that are used to compute present value of future losses for tax purposes. If
Treasury uses long-term market interest rates, that will tend to overstate the present value of
losses paid in the near future while underestimating the present value of losses paid further into
the future. A tax expenditure arises if the net present value of losses calculated by insurers for tax
purposes is greater than the true net present value of the losses.

PURPOSE: According to the Congressional Research Service, Requiring most property and
casualty companies to calculate the present value of future losses using discount rates
specified by the Treasury may simplify the calculation of tax liability for those insurers. In
addition, the relative simplicity of the methods may help ensure that the tax treatment of property
and casualty companies is uniform.
333

IMPACT: CRS states that, Determining the distribution of benefits is difficult because
ownership of most property and casualty insurance companies is widely dispersed, either among
shareholders in stock companies or policyholders in mutual companies.
334
In addition,
Allowing property and casualty insurance companies an advantageous tax status, based on the
potential mismatch between simple tax rules and actual financial management practices, may
allow those insurers to attract economic resources from other sectors of the economy, thus
creating economic inefficiencies.
335

333

334

335
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Income Tax
Special Rules

109. Inventory accounting

Internal Revenue Code Sections: 475, 491-492
Tota
Total $3,753 $3,927 $4,042 $4,216

DESCRIPTION: Businesses that sell goods generally must maintain inventory records to
determine the cost of the goods sold. Businesses can account for inventory on an item-by-item
basis, but may also use rules such as first-in, first-out (FIFO) accounting, which assumes that the
most recent item sold is the earliest one that was purchased, and last-in, first-out (LIFO)
accounting, which assumes that the most recent item sold is the last one purchased. Under FIFO,
firms may choose the lower of cost or market (LCM) method, which allows them to deduct losses
on goods that have fallen in value below their original cost while in inventory. LIFO can only be
used if it is also used for financial reporting, although it is not allowable for securities dealers.

Basic FIFO is seen as the standard method of accounting for costs by matching the order of
purchase with the order of sale. The use of the LCM method under FIFO, as well as LIFO more
generally, are considered tax expenditures because they provide more favorable tax treatment
than basic FIFO. LIFO allows a firm to exclude the appreciation in value of inventory when
prices are rising, whereas LCM allows a firm to recognize losses when inventory drops in value.

PURPOSE: According to the Congressional Research Service, LIFO was originally adopted to
allow a standard accounting practice.
336
Because price inflation was very low, LIFO originally
had a very minor impact. CRS also notes that LCM was considered a conservative accounting
practice which reflected the loss in value of inventories.
337
President Obamas FY 2010 and FY
2011 budget requests included a proposal to repeal both LIFO and LCM.

IMPACT: One study found that LIFO is most heavily used by the chemical, furniture, general
merchandise, and metal industries, while another study concluded that it is most often used by the
petroleum industry and by motor vehicle, food and beverage, and general merchandise
retailers.
338
LIFO allows firms to lower their tax burden by reducing the difference between the
sales price and the cost of inventory, and may even encourage firms expecting a high tax bill to
purchase more inventory before the year ends to reduce taxable income. Small firms may benefit
by using LSM for both tax and financial purposes.
339

336

337

338

339
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Income Tax
Special Rules

110. Special alternative tax on small property and casualty insurance
companies

Internal Revenue Code Sections: 321(a), 501(c)(15), 832, and 834
Tota
Total $58 $58 $58 $58

DESCRIPTION: Insurance companies that are not classified as life insurance companies (mostly
property and casualty insurance companies) enjoy tax-exempt status if their annual gross receipts
are $600,000 or less and if premiums account for 50 percent or less of their gross receipts.
Mutual insurance companies may enjoy tax-exempt status if their annual gross receipts are
$150,000 or less, and if more than 35 percent of the receipts consist of premiums.

Slightly larger insurance companies that are not classified as life insurance companies may elect
to be taxed only on their taxable investment income, provided that net written premiums and
direct written premiums each do not exceed $1.2 million.

PURPOSE: Small insurance companies have enjoyed tax advantages for more than a century,
dating back to a time when tax-exempt fraternal organizations provided life insurance to about 30
percent of the population. The Congressional Research Service states that, These provisions
may have been included to encourage formation of small insurance companies to serve specific
groups of individuals or firms that could not easily obtain insurance through existing insurers.
340

IMPACT: Due to this provision, Some very small non-life insurance companies are exempted
from taxation entirely, while slightly larger non-life insurance companies may choose a
potentially advantageous tax status instead of being taxed at the regular corporate tax rate of 34
percent.
341
It is difficult to determine how the benefits of the deduction are distributed because,
(O)wnership of some of these companies may be widely dispersed. Competitive pressures may
force companies to pass some of these benefits on to insurance policyholders via lower
premiums. In other cases, a set of companies may set up a captive or minicaptive insurance
company, which provides insurance policies in exchange for premiums. In these cases,
stakeholders in the parent companies benefit from the tax exemption.
342

CRS notes that the deduction violates economic principles and creates costs for society as a
whole. First, The principle of basing taxes on the ability to pay, often put forth as a requisite of
an equitable and fair tax system, does not justify reducing taxes on business income for firms

340

341

342
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Page 170
below a certain size. In addition, Imposing lower tax rates on smaller firms distorts the
efficient allocation of resources, since it offers a cost advantage based on size and not economic
performance. This tax reduction serves no simplification purpose, since it requires an additional
set of computations and some complex rules to prevent abuses.
343

343
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Income Tax
Special Rules

111. Apportionment of research and development expenses for
determining foreign tax credits

Internal Revenue Code Sections: 861-863 and 904 (also see IRS Regulation 1.861-17)
Total
Total $290 $290 $232 $174

DESCRIPTION: This tax expenditure arises from a complicated set of rules governing the
allocation of research and development (R&D) expenses by multinational corporations. These
rules allow some corporations to claim larger foreign tax credits that can be used to offset U.S.
corporate tax liability.

When foreign-source income is repatriated to the U.S. in the form of dividends, royalties, or other
income, the U.S. parent corporation can claim a credit against its U.S. tax liability for any foreign
taxes the subsidiary has paid on that income, in order to avoid double taxation of the income. The
credit cannot exceed the U.S. tax due on the foreign-source income. Multinational corporations
must allocate deductible expenses between foreign and domestic income, but this is difficult in
the case of R&D because of its long-term nature.

IRS regulations require U.S.-based multinational corporations to allocate a portion of R&D
expenditures to foreign countries even if the research was performed entirely in the U.S. Because
most foreign governments do not allow a tax deduction for R&D, the required allocation of R&D
expenses to these countries raises the amount of foreign tax paid and therefore increases foreign
tax credits against U.S. taxable income.
344

PURPOSE: According to the Congressional Research Service, the relevant IRS regulations were
guided by the notion that if R&D conducted in the United States often contributes to the
development of goods and services sold in foreign markets, then the accurate measurement of
foreign income for U.S. multinational companies requires that part of their domestic R&D
expenses be deducted from foreign income.
345

IMPACT: The effects of the R&D apportionment rules are unclear. Supporters of the regulations
contend that allocating all R&D expenses to U.S. income would be equivalent to allowing a
double deduction in cases where foreign countries provide a deduction. Critics argue that the
regulations discourage R&D and encourage U.S. companies to transfer some of their R&D to
foreign locations with higher tax rates.
346

344
This description is based on U.S. Senate, Committee on the Budget, pp. 39-42.

345

346
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Income Tax
Special Rules

112. Interest-charge domestic international sales corporations

Internal Revenue Code Sections: 991-997
Total
Total $232 $232 $232 $232

DESCRIPTION: An Interest-Charge Domestic Sales Corporation (IC-DISC) is a domestic
corporation, usually formed as a tax-exempt subsidiary of another corporation or trust, that
exports U.S. products. The parent company pays the IC-DISC a tax-deductible commission for
its qualified export sales. Because the IC-DISC is tax-exempt, distributions to IC-DISC
shareholders are taxed only once at the lower individual dividend and capital gains tax rates. As a
result, the shareholders enjoy a preferred after-tax return which represents a tax expenditure.

IC-DISC shareholders may also defer up to $10 million in income that is attributable to qualified
export sales. An interest charge is imposed on shareholders, however, based on the distribution
that would have occurred without the deferral. The $10 million deferral limit was intended to
limit the benefit of IC-DISC activity to smaller businesses.

PURPOSE: According to the Congressional Research Service, IC-DISC was intended to
increase U.S. exports and provide an incentive for U.S. firms to operate domestically rather than
abroad. Additionally, IC-DISC was adopted as a way to partially offset export subsidies
offered by foreign countries.
347

IMPACT: Although IC-DISCs are intended to boost the U.S. economy by increasing exports and
discouraging U.S. corporations from establishing subsidiaries in other countries, CRS highlights a
number of negative consequences. For example, With flexible exchange rates, an increase in
U.S. exports resulting from IC-DISC likely causes an appreciation of the U.S. dollar relative to
foreign currencies. In response, U.S. citizens could be expected to increase their consumption of
imported goods, possibly at the expense of domestically produced substitutes. As a result, no
improvement in the balance of trade occurs and domestic employment could decrease.

CRS also points to inefficiencies that IC-DISC may introduce into the allocation of productive
economic resources within the U.S. economy, as only domestic exporters benefit from the
subsidy. Additionally, because the tax benefit is related to the production of exported goods and
services, domestic consumers receive no direct consumption benefit. Foreign consumers, on the
other hand, benefit from lower-priced goods.
348

347

348
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Page 173

PART II: LOCAL TAX EXPENDITURES

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Page 174

INCOME TAX
(LOCAL BUSINESS AND PERSONAL INCOME TAX)
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Page 175
Income Tax
Exemptions

113. Additional personal exemption for the blind

District of Columbia Code: D.C. Official Code 47-1806.02(d)
Sunset Date: None
Year Enacted: 1987
Cl Total
Business Income Tax Loss $0 $0 $0 $0
Total $90 $92 $95 $95

DESCRIPTION: All District of Columbia taxpayers may claim a personal exemption, which
equals $1,675 for tax year 2013. An additional exemption of equal value ($1,675) is available for
a blind taxpayer, and for the blind spouse or domestic partner of a taxpayer, if the spouse or
partner has no gross income during the taxable year and is not the dependent of another taxpayer.

The personal exemption available to all taxpayers is not considered a tax expenditure because it
can be seen as part of the normal tax structure that helps determine the zero-tax bracket. By
contrast, the personal exemption for the blind is considered a tax expenditure because it departs
from the standard rule.

The District provides a larger additional exemption for the blind than Maryland ($1,000) or
Virginia ($800).
349
The federal government provides an additional standard deduction for the
blind equal to $1,500 for single filers and $1,200 for married individuals (tax year 2013).

D.C. law provides that the value of the exemption shall be adjusted annually to reflect increases
in the cost of living. The annual cost-of-living adjustment is rounded down to the next lowest
multiple of $50.
350

In December 2013 the D.C. Tax Revision Commission, an expert advisory panel chaired by
former Mayor Anthony Williams, recommended increasing the D.C. personal exemption to the
federal level (currently $3,900) and then phasing out the exemption beginning at an income level
of $150,000 for single filers and $200,000 for joint filers. This change would make the income
tax more progressive and offset some of the revenue loss from increasing both the personal
exemption and the standard deduction.
351

349
Wisconsin Legislative Fiscal Bureau, Individual Income Tax Provisions in the States, Informational
Paper 4 (January 2013), p. 11.

350
In other words, if the cost-of-living adjustment resulted in an increase of $25, it would be rounded down
to zero; if it resulted in an increase of $75, it would be rounded down to $50. The cost-of-living adjustment
is made using the Consumer Price Index for the Washington-Baltimore Metropolitan Statistical Area for all
urban consumers, published by the U.S. Department of Labor. See D.C. Official Code 47-
1801.04(11)(A) and 47-1806.02(i).

351
See www.dctaxrevisioncommission.org.
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Page 176
PURPOSE: The purpose of this provision is to reduce the tax burden of taxpayers who are blind
or who have blind spouses or domestic partners, based on the assumption that someone who is
blind faces additional expenses that make it harder to maintain an adequate standard of living.

IMPACT: Taxpayers who are legally blind, or have a legally blind spouse or domestic partner,
benefit from this provision. In tax year 2011, 830 individuals claimed the exemption and tax
filers with income at or below $50,000 accounted for 65 percent of the total amount exempted
(see table below).

The additional personal exemption for the blind violates the principle of horizontal equity. As
stated by the Congressional Budget Office in discussing the additional federal deduction for the
blind, (N)o analogous relief is provided to deaf people or to those with other disabilities who
confront other, similar, expenses.
352
Moreover, the additional personal exemption does not
benefit blind people who have no tax liability before taking the exemption.

Income Category (AGI) Number Share Amount
($ in 000s)
Share
Breakeven or Loss 38 5% $64 5%
$1 to $25,000 274 33% $459 33%
$25,001 to $50,000 220 27% $369 27%
$50,001 to $75,000 88 11% $147 11%
$75,001 to $100,000 58 7% $97 7%
$100,001 to $150,000 79 10% $132 10%
$150,001 to $200,000 17 2% $28 2%
Over $200,000 56 7% $94 7%
Total 830 100% $1,390 100%
Additional personal exemption for the blind -- 2011

352
Congressional Budget Office, Budget Options, Vol. 2 (August 2009), p. 198.
________________________________________________________________________________________________

Page 177
Income Tax
Exemptions

114. Additional personal exemption for the elderly

District of Columbia Code: D.C. Official Code 47-1806.02(e)
Sunset Date: None
Year Enacted: 1987
Cl Total
Total $4,652 $4,787 $4,922 $4,922

DESCRIPTION: All District of Columbia taxpayers may claim a personal exemption, which
equals $1,675 for tax year 2013. An additional exemption of equal value ($1,675) is available for
an elderly taxpayer (someone who reached age 65 before the end of the taxable year), and another
exemption is available for the elderly spouse or domestic partner of the taxpayer, if the spouse or
partner has no gross income during the taxable year and is not the dependent of another taxpayer.

The personal exemption available to all taxpayers is not considered a tax expenditure because it
can be seen as part of the normal tax structure that helps determine the zero-tax bracket. By
contrast, the personal exemption for the elderly is considered a tax expenditure because it departs
from the standard rule.

The District provides a larger additional exemption for the elderly than Maryland ($1,000) or
Virginia ($800).
353
The federal government provides an additional standard deduction for the
elderly equal to $1,500 for single filers and $1,200 for married individuals (tax year 2013).

D.C. law provides that the value of the exemption shall be adjusted annually to reflect increases
in the cost of living. The annual cost-of-living adjustment is rounded down to the next lowest
multiple of $50.
354

former Mayor Anthony Williams, recommended increasing the D.C. personal exemption to the
federal level (currently $3,900) and then phasing out the exemption beginning at an income level
of $150,000 for single filers and $200,000 for joint filers. This change would make the income
tax more progressive and offset some of the revenue loss from increasing both the personal
exemption and the standard deduction.
355

353
Wisconsin Legislative Fiscal Bureau, p. 11.

354
In other words, if the cost-of-living adjustment resulted in an increase of $25, it would be rounded down
to zero; if it resulted in an increase of $75, it would be rounded down to $50. The cost-of-living adjustment
is made using the Consumer Price Index for the Washington-Baltimore Metropolitan Statistical Area for all
urban consumers, published by the U.S. Department of Labor. See D.C. Official Code 47-
1801.04(11)(A) and 47-1806.02(i).

355
________________________________________________________________________________________________

Page 178

PURPOSE: The purpose of this provision is to reduce the tax burden of elderly taxpayers and
their families. The additional exemption reflects the assumption that the elderly face additional
expenses, such as medical bills, that make it harder to maintain an adequate standard of living. In
addition, some argue that the exemption is appropriate because many senior citizens have fixed
incomes.

IMPACT: Elderly taxpayers, as well as taxpayers with an elderly spouse or domestic partner,
benefit from this provision. During tax year 2011, 43,024 senior citizens claimed the exemption
and those with income at or below $50,000 accounted for 56 percent of the total amount
exempted (see table below).

The additional personal exemption for the elderly violates the principle of horizontal equity.
Non-elderly taxpayers with the same economic income do not receive an equivalent exemption.
In discussing the additional federal standard deduction for the elderly, the Congressional Budget
Office points out that the poverty rate among the elderly is now the lowest of all age groups.
356

($ in 000s)
Share
Breakeven or Loss 1,509 4% $2,528 4%
$1 to $25,000 12,176 28% $20,395 28%
$25,001 to $50,000 10,156 24% $17,011 24%
$50,001 to $75,000 5,600 13% $9,380 13%
$75,001 to $100,000 3,384 8% $5,668 8%
$100,001 to $150,000 3,809 9% $6,380 9%
$150,001 to $200,000 2,027 5% $3,395 5%
$200,001 to $500,000 3,181 7% $5,328 7%
Over $500,000 1,182 3% $1,980 3%
Total 43,024 100% $72,065 100%
Additional personal exemption for the elderly -- 2011

356
Congressional Budget Office, Budget Options, Vol. 2, p. 198.

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Page 179
Income Tax
Subtractions

115. Qualified high-technology companies: depreciable business assets

District of Columbia Code: D.C. Official Code 47-1803.03(a)(18)
Sunset Date: None
Year Enacted: 2001
Cl Total
Business Income Tax Loss no estimate no estimate no estimate no estimate
Total no estimate no estimate no estimate no estimate

DESCRIPTION: Qualified high-technology companies benefit from more generous rules
regarding the franchise tax deduction for personal property expenses. Whereas other businesses
can subtract the lesser of $25,000 or the actual cost of the property for the year the property is
placed in service, a qualified high-technology company can subtract the lesser of $40,000 or the
actual cost of the property for the year the property is placed in service.

A high-technology company is considered qualified if it (1) has two or more employees in the
District, and (2) derives at least 51 percent of gross revenues earned in the District from
technology-related goods and services such as Internet-related services and sales; information and
communication technologies, equipment and systems that involve advanced computer software
and hardware; and advanced materials and processing technologies. The expensing rules are part
of a package of incentives for high-technology firms authorized by D.C. Law 13-256, the New
E-conomy Transformation Act of 2000.
357

Although Maryland does not offer a comparable deduction, the state provides several types of
financial assistance to information and technology firms, including the Maryland Venture Fund, a
state-funded seed and early-stage equity fund that has invested 60 percent of its resources in
technology companies; the Challenge Investment Program, which helps seed-stage companies
defray some of the initial costs involved in bringing new products to market; and the Enterprise
Investment Fund Program, which makes direct equity investments in emerging technology
companies.
358
In addition, Maryland provides tax credits for those who invest at least $25,000 in
qualified Maryland biotechnology companies.

Virginia permits technology businesses to exempt from taxable income the long-term capital
gains arising from investment in a qualified technology business, which must have gross revenues
of $3 million or less in the most recent year, have its principal office in Virginia, and conduct its
business primarily, or do substantially all of its production, in Virginia. The exemption applies to
investments made between April 1, 2010, and June 30, 2015. Virginia also offers a Qualified
Equity and Subordinated Debt Investments Credit to corporate and individual taxpayers who

357
The other incentives, which include a reduced corporate tax rate, employment credits, property tax
abatements, sales tax exemptions, and personal property tax exemptions, are discussed elsewhere in this
section.

358
Maryland Department of Business and Economic Development, Business in Maryland: Information &
Technology, available at www.choosemaryland.org.
________________________________________________________________________________________________

Page 180
invest in a pre-qualified small business venture that is primarily engaged in certain technology
fields. Finally, Arlington County uses authority provided by state law to reduce business and
professional license tax rates to qualifying firms with 100 or more employees located in
designated technology zones.

PURPOSE: The purpose of this provision is to encourage the growth of high-technology
companies in the District of Columbia and thereby expand the Districts economy and
employment base.

IMPACT: High-technology companies in the District of Columbia benefit from this provision.
There is no estimate of the forgone revenue because the subtraction is reported on the same line
on the business tax forms as other subtractions; therefore, relevant data were unavailable.

The accelerated depreciation for high-technology companies means that amounts available for
deduction in later years will be smaller; nevertheless, the companies benefit because the enhanced
deduction gives them resources immediately that they can put to productive use. The provision
violates the principle of horizontal equity because companies in other industries with similar
levels of income and personal property expenses cannot subtract the same amount.
________________________________________________________________________________________________

Page 181
Income Tax
Subtractions

116. College savings plan contributions

District of Columbia Code: D.C. Official Code 47-4501 - 47-4512
Sunset Date: None
Year Enacted: 2001
l Total
Total $1,066 $1,066 $1,066 $1,066

DESCRIPTION: The District of Columbia College Savings Plan allows residents to create
college savings accounts to benefit from incentives for qualified tuition programs provided by
section 529 of the U.S. Internal Revenue Code. Contributions to a college savings account must
be spent on qualified higher education expenses, which include tuition, fees, books, supplies,
and equipment.
359
Anyone can open a college savings account on behalf of a particular child. At
the end of FY 2012, the D.C. plan had 13,808 accounts with an average balance of $16,190.
360

The earnings in a college savings account are exempt from federal income tax, as is the
distribution of funds in the account to pay for qualified higher education expenses. The District
of Columbia conforms to those federal rules when applying the local income tax (see tax
expenditure #13, Earnings of qualified tuition programs).

The District of Columbia also allows account owners to take a local income tax deduction of as
much as $4,000 each year for single filers, or $8,000 for joint filers. If the account owner
contributes more than the maximum amount in a tax year, the excess amount may be carried
forward, subject to the annual limit, for five years. The estimate of forgone revenue shown above
reflects the loss resulting from the local income tax deduction.

College savings plans are offered in 49 states, 34 of which offer state tax deductions or credits to
those who contribute to the plans, in addition to the federal tax incentives.
361
In Maryland, a
taxpayer can deduct up to $2,500 in annual account contributions per child, while in Virginia a
taxpayer can deduct up to $4,000 in annual account contributions per child. Both states also
allow residents to exclude the earnings on their 529 account investments from state income tax.

PURPOSE: The purpose of this provision to increase access to higher education by helping
individuals and families save for higher education on a tax-favored basis.

359
See Section 529(c)(3) of the Internal Revenue Code for the statutory definition of qualified higher
education expenses.

360
D.C. 529 College Savings Plan, Fiscal Year 2012 Annual Report, available at
www.dccollegesavings.com.

361
National Association of State Treasurers, College Savings Plans Network Finds Average 529 Plan
Account Balance Increased 26 Percent over Twelve-Month Period, press release issued September 29,
2011, p. 2.
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Page 182

IMPACT: Families and others who pay for higher education benefit from the subtraction, as do
the students whose educations are financed, at least in part, by the tax-favored college savings
accounts. Moreover, there may be a general benefit to society from having a more educated
citizenry and productive workforce.

During tax year 2008 (the last year for which data were collected), 2,404 tax filers claimed this
subtraction. As shown in the table below, tax filers with annual income above $100,000
accounted for 85 percent of the total amount subtracted.

Higher-income families stand to benefit more from college savings plans because they have the
resources to save for college and face higher marginal tax rates that increase the value of tax
deductions and exclusions. Urban Institute researchers have questioned whether the plans have
an impact on college savings because higher-income families would likely set aside funding for
higher education even without the tax incentives.
362

College Savings Program - 2008
($ in 000s)
Share
Breakeven or Loss 11 0.5% $43 0.4%
$1 to $25,000 84 3% $207 2%
$25,001 to $50,000

141 6% $313 3%
$50,001 to $75,000

168 7% $475 4%
$75,001 to $100,000

202 8% $621 6%
$100,001 to $150,000

425 18% $1,560 15%
$150,001 to $200,000

364 15% $1,606 15%
$200,001 to $500,000

788 33% $4,443 41%
Over $500,000

221 9% $1,462 14%
Total

2,404 100% $10,731 100%

362
Maag and Fitzpatrick, pp. 24-25.
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Page 183
Income Tax
Subtractions

117. Public school teacher expenses

District of Columbia Code: D.C. Official Code 47-1803.03(b-2)
Sunset Date: None
Year Enacted: 2007C
l Total
Total $112 $112 $112 $112

DESCRIPTION: An individual who has served as a classroom teacher in a traditional public
school or a public charter school for an entire tax year may subtract the following expenses from
District of Columbia gross income: (1) the amount paid for basic classroom materials and
supplies needed for teaching, up to $500 per year, and (2) the amount paid as tuition and fees for
post-graduate education, professional development, or licensing and certification requirements,
up to $1,500 per year. If the taxpayer claimed a deduction for classroom materials and supplies,
or tuition and fees on his or her federal income tax return, then those expenses may not be
claimed as a deduction from District of Columbia gross income.

Federal law allowed elementary and secondary school teachers and other educators (teacher
aides, counselors, principals), whether employed by a public or private school, to deduct up to
$250 in annual expenses for school supplies (see tax expenditure #72, Classroom expenses of
elementary and secondary school educators, in this report). This provision expired on December
31, 2013, but it might be reinstated. Any deduction claimed pursuant to this provision of federal
law could not also be deducted under this provision of local law.

Maryland offers public school classroom teachers a non-refundable annual tuition tax credit of up
to $1,500 for courses necessary to achieve or maintain advanced teacher certification. To receive
the credit, the teacher must complete the course with a grade of B or better, have a satisfactory
performance evaluation, and not have been reimbursed by his or her school system for the tuition
paid. Virginia allows a licensed primary or secondary school teacher to deduct 20 percent of
unreimbursed tuition costs paid to attend continuing education courses required as a condition of
employment, provided that these expenses were not deducted from federal gross income.

PURPOSE: The purpose of the subtraction is to defray the costs that teachers often absorb for
classroom supplies, materials, and professional development, and to enhance the public schools
ability to recruit and retain highly qualified teachers.

IMPACT: Classroom teachers are the direct beneficiaries of the subtraction, but there may be
spillover benefits for society if the provision helps public schools in the District of Columbia
schools attract and retain skilled teachers. On the other hand, the subtraction may violate the
principle of horizontal equity because other professionals such as child welfare workers do not
receive a similar deduction. Decision-makers might also consider whether it makes more sense to
pursue the policy goals through direct spending for school supplies and professional
development, rather than through a tax provision.
________________________________________________________________________________________________

Page 184

During tax year 2008 (the last year for which data were collected), 2,338 tax filers claimed the
subtraction, which is squarely focused on middle-income earners. As shown in the table below,
tax filers with incomes between $25,000 and $75,000 accounted for 56 percent of the total
amount deducted.

($ in 000s)
Share
$1 to $25,000 385 16% $199 14%
$25,001 to $50,000 800 34% $398 28%
$50,001 to $75,000 535 23% $398 28%
$75,001 to $100,000 234 10% $238 17%
$100,001 to $150,000 223 10% $107 8%
$150,001 to $200,000 83 4% $40 3%
Over $200,000 52 2% $27 2%
Total 2,338 100% $1,420 100%
Public School Teacher Expenses - 2008
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Page 185
Income Tax
Subtractions

118. Health insurance premiums paid for a domestic partner (business
income tax)

District of Columbia Code: D.C. Official Code 47-1803.03(a)(15)
Sunset Date: None
Year Enacted: 1992
Cl Total
Total $170 $178 $188 $198

DESCRIPTION: A corporation, unincorporated business, or partnership in the District of
Columbia can deduct from gross income all health insurance premiums paid on behalf of an
employees family members or a domestic partner, provided that the benefits are offered to all
full-time employees who are D.C. residents. The federal government does not allow any
deductions on behalf of domestic partners, so such deductions are based only in D.C. law.

D.C. law defines a domestic partner as a person with whom an individual maintains a
committed relationship characterized by mutual caring and sharing of a mutual residence; who is
at least 18 years of age and competent to contract; who is the sole domestic partner of the other
person; and is not married.
363
A domestic partner can be of the same sex or the opposite sex.

Neither Maryland nor Virginia offers employers a similar tax deduction for domestic partners.

PURPOSE: The purpose of this provision is to make the tax treatment of health insurance
benefits more equitable by providing businesses with the same deduction from D.C. business
taxes that they receive for providing health benefits to other family members of an employee.

IMPACT: Businesses that pay health insurance premiums on behalf of domestic partners benefit
from this provision. Domestic partners also benefit indirectly because the provision lowers the
price to businesses of providing health benefits to domestic partners and therefore may increase
the availability and affordability of the benefits.

363
________________________________________________________________________________________________

Page 186
Income Tax
Subtractions

119. Health insurance premiums paid for a domestic partner (personal
income tax)

District of Columbia Code: D.C. Official Code 47-1803.02(a)(2)(W) and 46-401(b)
Sunset Date: None
Year Enacted: 2006
Total
Corporate Income Tax Impact $0 $0 $0 $0
Personal Income Tax Impact $24 $24 $25 $26
Total $24 $24 $25 $26

DESCRIPTION: An individual taxpayer may subtract from gross income the amount of any
health insurance premium paid by his or her employer for a domestic partner.

Individuals can also exclude from gross personal income the health insurance premiums that
employers pay for themselves and other family members, but that exclusion is provided in federal
law, to which the District conforms (see tax expenditure #32, Employer contributions for
medical care, medical insurance premiums and long-term care insurance premiums). The
federal government does not allow any tax deductions or exclusions on behalf of domestic
partners, so such tax benefits are based only in local law. The estimated revenue loss shown
above reflects the cost of providing the D.C. personal income tax deduction for health insurance
premiums paid for a domestic partner.

D.C. law defines a domestic partner as a person with whom an individual maintains a
committed relationship characterized by mutual caring and sharing of a mutual residence; who is
at least 18 years of age and competent to contract; who is the sole domestic partner of the other
person; and is not married.
364
A domestic partner can be of the same sex or the opposite sex.

Neither Maryland nor Virginia offers individuals a similar tax deduction for domestic partners.

PURPOSE: The purpose of the subtraction is to promote tax equity for domestic partners, and to
expand their access to health insurance. The health insurance premiums paid by employers on
behalf of spouses are not counted in District of Columbia gross income as a result of federal
conformity; this provision offers the same treatment to domestic partners. The provision also
makes health insurance more affordable to domestic partners.
365

IMPACT: Domestic partners and their families benefit from the subtraction. During tax year
2009 (the last year for which data were collected), 267 tax filers claimed the subtraction. Tax
filers with incomes over $75,000 accounted for 50 percent of the total amount deducted, as shown
in the table on the next page. It is estimated that the number of claimants has dropped since 2009

364

365
Council of the District of Columbia, Committee on Finance and Revenue, Report on Bill 16-495, the
Domestic Partner Health Care Benefits Tax Exemption Act of 2005, October 12, 2005.
________________________________________________________________________________________________

Page 187
because same-sex marriage is now legal in the District of Columbia, reducing the appeal of
domestic partner benefits for same-sex couples.

The deduction for health insurance premium costs may lead employees to seek and employers
to provide -- more of their compensation in terms of health benefits than they would otherwise
offer, creating an efficiency loss.

($ in 000s)
Share
Breakeven or Loss 3 1% $7,289 1%
$1 to $25,000 33 12% $93,346 14%
$25,001 to $50,000 64 24% $88,752 14%
$50,001 to $75,000 47 18% $140,916 22%
75,001 to $100,000 35 13% $89,807 14%
$100,001 to $150,000 39 15% $109,066 17%
$150,001 to $200,000 17 6% $39,845 6%
$200,001 to $500,000 26 10% $75,237 11%
Over $500,000 3 1% $10,684 2%
Total 267 100% $654,942 100%
Health Insurance Premiums Paid for a Same-Sex Spouse or Domestic Partner -- 2009

________________________________________________________________________________________________

Page 188
Income Tax
Subtractions

120. Health professional loan repayments

District of Columbia Code: D.C. Official Code 7-751.11
Sunset Date: None
Year Enacted: 2006
Cl Total
Total $70 $70 $70 $70

DESCRIPTION: The District of Columbia Health Professional Recruitment Program was
established to serve as a recruitment tool for health professionals in the District. Subject to the
availability of funds, the program repays the outstanding principal, interest, and related expenses
for government or commercial loans obtained by an individual for tuition, fees, and reasonable
educational expenses incurred while obtaining a health professional degree. The loan repayments
made by the District government are taxable under the federal income tax, but are not considered
income for purposes of District of Columbia income tax.

In return for the loan repayment, the health professional must work for at least two years and a
maximum of four years at a non-profit facility located in a health professional shortage area or
medically underserved area in the District of Columbia designated by the U.S. Department of
Health and Human Services. The non-profit facility must offer primary care, mental health, or
dental services to District of Columbia residents regardless of their ability to pay.

Physicians, dentists, and nurses are among the health professionals who are eligible to apply for
the program. Selection is based on professional qualifications and relevant experience,
professional achievements, and other indicators of competency. The Department of Health
administers the program.

In 2012, Maryland policymakers enacted legislation to establish Health Enterprise Zones where
residents experience measurable health disparities and poor health outcomes. A health care
practitioner who provides primary care, behavioral health services, or dental health services in a
designated zone may apply to the Department of Health and Mental Hygiene (DHMH) for a state
income tax credit if he or she (1) demonstrates competency in cultural, linguistic, and health
literacy, (2) accepts and provides care for Medicaid and uninsured patients, and (3) meets any
other criteria set by DHMH. A practitioner in a Health Enterprise Zone may also apply for a
refundable $10,000 credit against the state income tax for hiring workers who help provide
health-care services in the zone. These tax credits are budgeted, so they are subject to the
availability of funds and provided on a first-come, first-served basis.

PURPOSE: The purpose of this provision is to recruit community-based providers to our
neediest neighborhoods by creating an incentive for those health professionals who choose to
work where a health care shortage exists.
366

366
Council of the District of Columbia, Committee on Health, Report on Bill 16-420, the District of
Columbia Health Professional Recruitment Program Act of 2005, October 14, 2005, p. 1.
________________________________________________________________________________________________

Page 189

IMPACT: Health professionals who agree to work in health professional shortage or medically
underserved areas in the District of Columbia benefit from this provision. Low-income residents
who receive health care from non-profit entities in the targeted areas should also benefit from this
provision.

During tax year 2009 (the latest year for which data are available), 80 tax filers claimed the
subtraction. As shown in the table below, tax filers with incomes at or below $75,000 accounted
for 72 percent of the total amount subtracted, reflecting the lower salaries that health
professionals receive at non-profit facilities in medically underserved areas.

($ in 000s)
Share
$1 to $25,000 16 20% $130,156 25%
$25,001 to $50,000 25 31% $97,626 19%
$50,001 to $75,000 20 25% $136,954 27%
$75,001 to $100,000 6 8% $75,036 15%
$100,001 to $150,000 6 8% $46,107 9%
$150,001 to $200,000 3 4% $14,700 3%
Over $200,000 2 3% $10,007 2%
Total 80 100% $516,232 100%
Health Professional Loan Repayments -- 2009
________________________________________________________________________________________________

Page 190
Income Tax
Subtractions

121. Long-term care insurance premiums

District of Columbia Code: D.C. Official Code 47-1803.03(b-1)
Sunset Date: None
Year Enacted: 2005
Cl Total
Total $225 $225 $225 $225

DESCRIPTION: An individual may subtract from District of Columbia gross income the amount
paid annually in premiums for long-term care insurance, up to a limit of $500 per year, per
individual, whether he or she is filing individually or jointly.

According to the AARP Public Policy Institute, 26 states and the District offered long-term care
tax incentives as of 2007.
367
Maryland offers a non-refundable long-term care insurance credit,
rather than a deduction. The credit equals the amount of premiums paid, up to a maximum of
$350 for each insured person aged 40 or younger, and a maximum of $500 for each insured
person aged 41 or older. Virginia offered a non-refundable credit equal to 15 percent of long-
term care insurance premiums paid during the tax year, but the credit expired on December 31,
2013. Virginia still allows a state tax deduction for long-term care insurance premiums, but the
deduction is disallowed if a federal deduction was already claimed for the same amount.

former Mayor Anthony Williams, recommended repealing the subtraction for long-term care
insurance premiums. The Commission contended that repealing this tax expenditure (and several
others) would promote horizontal equity and that tax relief targeted to particular activities or
groups would be less necessary if the Commissions proposal to increase the standard deduction
and personal exemption were adopted.
368

PURPOSE: The purpose of the subtraction is threefold: (1) to encourage people to purchase
long-term care insurance policies, (2) to protect peoples assets as they age or become disabled
and rely on long-term care, and (3) to relieve a burden on the Districts general fund by avoiding
Medicaid expenditures for long-term care.
369

IMPACT: Individuals purchasing long-term care insurance benefit from this provision. During
tax year 2008 (the last year for which data were collected), 4,016 tax filers claimed this

367
David Baer and Ellen OBrien, Federal and State Income Tax Incentives for Private Long-Term Care
Insurance, AARP Public Policy Institute (November 2010), pp. 9-10.

368

369
Long-Term Care Insurance Tax Deduction Act of 2004, December 6, 2004, pp. 2-3.

________________________________________________________________________________________________

Page 191
subtraction. As shown in the table below, tax filers with income over $100,000 accounted for
more than half (51 percent) of the total amount subtracted.

It is not known if beneficiaries would have purchased long-term care insurance in the absence of
the subtraction, and there are no benefits for those without tax liability. According to the Kaiser
Commission on Medicaid and the Uninsured, the long-term care annual premiums (providing
three years of coverage) for a single person averaged $1,512 for a 40-year-old and $4,515 for a
70-year-old in 2008.
370

($ in 000s)
Share
$1 to $25,000 365 9% $163 7%
$25,001 to $50,000 649 16% $303 13%
$50,001 to $75,000 625 16% $310 14%
$75,001 to $100,000 558 14% $299 13%
$100,001 to $150,000 811 20% $476 21%
$150,001 to $200,000 347 9% $235 10%
$200,001 to $500,000 520 13% $388 17%
Over $500,000 101 3% $74 3%
Total 4,016 100% $2,267 100%
Long Term Insurance - 2008

370
Anne Tumlinson, Christine Aguiar, and Molly OMalley Watts, Closing the Long-Term Care Funding
Gap: The Challenge of Private Long-Term Care Insurance, June 2009, p. ii.

________________________________________________________________________________________________

Page 192
Income Tax
Subtractions

122. Housing relocation and assistance payments

District of Columbia Code: D.C. Official Code 42-2851.05, 42-3403.05, and 47-
1803.02(a)(2)(R)
Sunset Date: None
Year Enacted: 1980 (rental housing conversion) and 2002 (federal housing
assistance programs)
Personal Income Tax Loss minimal minimal minimal minimal
Total minimal minimal minimal minimal

DESCRIPTION: The Rental Housing Conversion and Sale Act of 1980 (D.C. Law 3-86)
requires an owner who converts rental housing into a condominium or cooperative to provide a
relocation payment to each tenant who does not purchase a unit or share, or enter into a lease of at
least five years. In addition, the Department of Housing and Community Development (DHCD)
must provide a housing relocation payment of up to $1,000 as well as housing assistance
payments for three years to each low-income tenant who does not purchase a unit or share in a
condominium or cooperative conversion. The formula for determining the housing assistance
payment is set forth in 42-3403.04 of the D.C. Official Code. Housing relocation and assistance
payments are excluded from D.C. income tax.

In addition, the Housing Act of 2002 (D.C. Law 14-114) authorizes the Mayor to provide
relocation services to the tenants of a building that discontinues its participation in a federal
housing assistance program. The relocation services include not only information about available
housing and relevant assistance programs, but also relocation payments of as much as $500 per
tenant. The relocation payments are excluded from D.C. income tax.

PURPOSE: The purpose of the exclusions for housing relocation and assistance payments is to
protect tenants, particularly low-income tenants, who are displaced by a landlords decision to
convert rental housing into owner-occupied housing or to cease participating in a federal housing
assistance program.

IMPACT: Tenants receiving housing relocation and assistance payments are the intended
beneficiaries of this provision. Although DHCD provides housing relocation and assistance
payments to tenants who are displaced by a rental housing conversion, the D.C. government has
never implemented the relocation payments for those displaced when a building exits from a
federal housing program, and there are no plans to do so at this time.
371
Because of the small
scale of the housing relocation and assistance program, the revenue loss for fiscal years 2014
through 2017 is estimated as minimal (less than $50,000 per year).

371
The authorizing statute provides that, The Mayor may provide relocation assistance payments of up to
$500 per tenant, based on need and pursuant to regulations promulgated by the Mayor (emphasis added).
Thus, the Mayor has discretion about whether to implement the program.
________________________________________________________________________________________________

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Income Tax
Subtractions

123. D.C. and federal government pension income

District of Columbia Code: D.C. Official Code 47-1803.02(a)(2)(N)
Sunset Date: None
Year Enacted: 1987
Total
Total $4,124 $4,228 $4,378 $4,542

DESCRIPTION: Taxpayers who are 62 years of age or older may subtract from District of
Columbia gross income the lesser of $3,000 or the actual amount of pension, military retired pay,
or annuity income received from the District of Columbia or the federal government during the
tax year. In order for an individual to qualify for this benefit, his or her pension, military retired
pay, or annuity must otherwise be subject to the D.C. income tax.

According to the Institute on Taxation and Economic Policy (ITEP), 36 states allow an income
tax exemption for private or public pension benefits. These exemptions range from exempting all
pension benefits to exempting only a narrow range of benefits such as those for military
veterans.
372

Maryland provides a pension exclusion (which covers federal, state, local, military, and private
pensions) equal to $27,800 minus Social Security and railroad retirement benefits for tax year
2013. Marylands exclusion is available only to taxpayers who are 65 years of age or older, or
who are totally disabled or have a spouse who is totally disabled.
373

Virginia does not offer a pension exclusion, but rather provides a broader age deduction. Each
individual born on or before January 1, 1939, can claim an age deduction of $12,000. For senior
citizens (age 65 and older) born on or after January 2, 1939, the age deduction is reduced by $1
for each dollar that taxpayer income exceeds $50,000 (for single taxpayers) or $75,000 (for
married couples).
374

former Mayor Anthony Williams, recommended repealing the subtraction for D.C. and federal
government pension income. The Commission contended that repealing this tax expenditure (and
several others) would promote horizontal equity and that tax relief targeted to particular activities

372
Institute on Taxation and Economic Policy, State Income Taxes and Older Adults, (September 2011),
p. 1.

373
See http://individuals.marylandtaxes.com.

374
See www.tax.virginia.gov.

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Page 194
or groups would be less necessary if the Commissions proposal to increase the standard
deduction and personal exemption were adopted.
375

PURPOSE: The purpose of the subtraction is to shield from taxation a portion of the pension
income earned by the elderly through public employment, thereby enhancing the economic self-
sufficiency of senior citizens on fixed incomes.

IMPACT: Taxpayers aged 62 or older who have District of Columbia or federal pension income
benefit from this provision. During tax year 2011, 15,541 tax filers claimed this subtraction. As
shown in the table below, tax filers with incomes at or below $75,000 accounted for the bulk (73
percent) of the total amount subtracted.

The subtraction of federal and D.C. government pension income violates the principle of
horizontal equity, because those with private pension income do not receive the same exclusion.
ITEP points out that, (M)any state income tax exemptions for elderly taxpayers apply only to
particular income sources, such as pension benefits and Social Security benefits, while providing
no relief for earned income such as salaries and wages. Special tax breaks for pension benefits
shift the cost of funding public services away from retirees and onto working taxpayers
including working seniors.
376

($ in 000s)
Share
$1 to $25,000 4,300 28% $13,081 26%
$25,001 to $50,000 4,629 30% $14,723 29%
$50,001 to $75,000 2,341 15% $7,856 16%
$75,001 to $100,000 1,342 9% $4,712 9%
$100,001 to $150,000 1,225 8% $4,219 8%
$150,001 to $200,000 557 4% $1,968 4%
$200,001 to $500,000 699 4% $2,346 5%
Over $500,000 116 1% $384 1%
Total 15,541 100% $50,301 100%
Pension Income --2011

375

376
Institute on Taxation and Economic Policy, State Income Taxes and Older Adults, p. 2.

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Page 195
Income Tax
Subtractions

124. D.C. and federal government survivor benefits

District of Columbia Code: D.C. Official Code 47-1803.02(a)(2)(N)
Sunset Date: None
Year Enacted: 1987
Total
Total $3,934 $4,033 $4,176 $4,332

DESCRIPTION: Taxpayers may exclude from their District of Columbia taxable income the
amount of any survivor benefits they received from the D.C. government or federal government if
they are 62 years of age or older by the end of the tax year. Neither Maryland nor Virginia
provides an income exclusion for survivor benefits.

This provision does not affect Social Security survivor benefits, which are excluded from taxation
under another provision of D.C. law (see tax expenditure # 129, Social Security benefits for
survivors and dependents).

PURPOSE: The purpose of the exclusion is to promote income security among elderly survivors
of D.C. government or federal government workers by shielding their benefits from taxation.

IMPACT: Individuals over the age of 62 who receive survivor benefits from the D.C.
government or federal government benefit from this provision. In 2011, 2,626 tax filers claimed
this subtraction. Tax filers with income at or below $50,000 accounted for the bulk (82 percent)
of the total subtractions, as shown in the table on the next page.

The exclusion of federal and D.C. government survivor benefits violates the principle of
horizontal equity, because those with private-sector survivors benefits do not receive the same
exclusion.

________________________________________________________________________________________________

Page 196
($ in 000s)
Share
$1 to $25,000 1,182 8% $20,154 42%
$25,001 to $50,000 645 4% $11,360 24%
$50,001 to $75,000 215 1% $4,180 9%
$75,001 to $100,000 76 0% $1,485 3%
$100,001 to $150,000 71 0% $1,498 3%
$150,001 to $200,000 22 0% $631 1%
$200,001 to $500,000 31 0% $723 2%
Over $500,000 2 0% $100 0%
Total 2,626 17% $47,980 100%
D.C. and Federal Government Survivor Benefits -- 2011

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Page 197
Income Tax
Subtractions

125. Disability payments for the permanently and totally disabled

District of Columbia Code: D.C. Official Code 47-1803.02(a)(2)(M)
Sunset Date: None
Year Enacted: 1985

Total(Dollars in thousands) FY 2014 FY 2015 FY 2016 FY 2017
Total $87 $89 $93 $96

DESCRIPTION: Taxpayers may exclude from adjusted gross income up to $5,200 in disability
payments, provided that (1) they were permanently and totally disabled when they retired, (2)
they had not reached the age required to retire under their employers regular (non-disability)
retirement program as of the first day of the taxable year, and (3) their other income was less than
$15,000.

This provision does not apply to Social Security disability benefits, which are excluded from
taxation under another provision of D.C. law (see tax expenditure # 130, Social Security benefits
for the disabled).

Virginia allows permanently and totally disabled taxpayers to exclude up to $20,000 in disability
plan income. Virginia taxpayers who claim the states age deduction for those over the age of 62
are not eligible for the exclusion. Maryland does not have a similar tax provision.

PURPOSE: The purpose of the subtraction is to maintain in D.C. law a provision of the U.S.
Internal Revenue Code that was abolished by the Social Security Amendments of 1983, thereby
preserving in local law a tax benefit to certain individuals with disability income.
377

IMPACT: Permanently and totally disabled individuals who receive disability payments, are not
eligible for their employers regular retirement plan, and meet the income standards benefit from
this provision. In tax year 2008 (the last year for which data were collected), 126 taxpayers
claimed the subtraction.

Because of the income limit, the subtraction assists only low-income individuals and households.
Moreover, the real value of the benefit has declined over time because the amount that can be
excluded ($5,200) as well as the limitation on other income ($15,000) have not been adjusted for
inflation or income growth.

377
Specifically, the federal government replaced a disability income exclusion with a new credit for the
permanently and totally disabled. Because a credit is not automatically mirrored in the D.C. income tax
system, D.C. policymakers apparently decided to retain the disability income exclusion in local law.
________________________________________________________________________________________________

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Income Tax
Subtractions

126. Income of persons with a permanent and total disability

District of Columbia Code: D.C. Official Code 47-1803.02(a)(2)(V)
Sunset Date: None
Year Enacted: 2005
Total
Total $553 $567 $587 $609

DESCRIPTION: A taxpayer who has been determined to have a permanent and total disability
by the U.S. Social Security Administration may exclude up to $10,000 from District of Columbia
gross income if he or she (1) is receiving Supplemental Security Income or Social Security
Disability, railroad retirement disability, or federal or District of Columbia government disability
payments, and (2) has a household adjusted gross income of less than $100,000.

Neither Maryland nor Virginia offers a similar exclusion, although Virginia allows permanently
and totally disabled taxpayers to exclude up to $20,000 in disability plan income.

PURPOSE: The purpose of this exclusion is to provide income support to people who cannot
work due to a permanent and total disability.

IMPACT: People with a permanent and total disability benefit from this provision. During tax
year 2008 (the last year for which data were collected), 680 tax filers claimed this subtraction.
As shown in the table below, the benefits accrue almost entirely to low- and moderate-income
taxpayers: tax filers with income of $50,000 or less accounted for 90 percent of the total amount
subtracted.

($ in 000s)
Share
Breakeven or Loss
136
20% $1,154 21%
$1 to $25,000
308
45% $2,566 46%
$25,001 to $50,000
159
23% $1,285 23%
$50,001 to $75,000
61
9% $475 9%
Over $75,000
16
2% $89 2%
Total 680 100% $5,569 100%
Income for people with a permanent and total disability -- 2008
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Income Tax
Subtractions

127. Railroad retirement system benefits

District of Columbia Code: D.C. Official Code 47-1803.02(a)(2)(L)
Sunset Date: None
Year Enacted: 1985
otal
Total $93 $95 $99 $103

DESCRIPTION: The District of Columbia exempts all railroad retirement benefits from the local
income tax, a policy that goes beyond the federal policy of exempting a portion of railroad
retirement benefits from the federal income tax (see tax expenditure #50, Social Security and
Railroad Retirement benefits). Maryland and Virginia also exempt all railroad retirement
benefits from the income tax. The estimate of forgone revenue shown above represents the
incremental revenue loss resulting from the Districts decision to exempt the railroad retirement
benefits that are subject to federal taxation.

Under the federal income tax, the portion of railroad retirement benefits that railroad workers
would receive if they were instead covered by Social Security is taxed on the same basis as Social
Security benefits. Specifically, up to 50 percent of Social Security benefits are taxable for
taxpayers with income between $25,000 and $34,000 (single filers) or $32,000 and $44,000 (joint
filers). Above those income ranges ($34,000 for a single filer and $44,000 for joint filers), up to
85 percent of Social Security benefits are subject to federal income tax.

In addition, non-Social Security equivalent benefits provided to railroad retirees, such as
supplemental annuity benefits, are subject to federal income tax regardless of any other income
that the retiree receives.

PURPOSE: The purpose of the subtraction is to help protect railroad retirement benefits as a
source of income support, and to ensure equitable tax treatment of railroad retirement and Social
Security benefits. Under D.C. law, all Social Security benefits are also exempt from the local
income tax (see tax expenditure #128, Social Security benefits for retired workers).

IMPACT: Individuals receiving railroad retirement payments benefit from this subtraction.
According to the Railroad Retirement Board, in the District of Columbia there are approximately
500 current beneficiaries of the railroad retirement program, who receive average benefits of
$586 per month.
378
Because D.C. taxpayers report their railroad retirement and Social Security
income on the same line of the income tax form, there are no data on the railroad retirement
subtraction by income level.

378
U.S. Railroad Retirement Board, Annual Railroad Retirement Act & Railroad Unemployment
Insurance Act Data, Table B27: Retirement and Survivor Benefits in Current-Payment Status on September
30, 2012, by Class and State, available at www.rrb.gov.
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Income Tax
Subtractions

128. Social Security benefits for retired workers

Sunset Date: None
Year Enacted: 1985
CTotal
Total $16,877 $17,304 $17,918 $18,587

DESCRIPTION: The District exempts all Social Security benefits from taxation, a policy that is
more generous than the federal treatment of Social Security benefits (see tax expenditure #50,
Social Security and Railroad Retirement Benefits). Under federal law, up to 50 percent of
Social Security benefits are taxable for taxpayers with provisional income between $25,000 and
$34,000 (single filers) or $32,000 and $44,000 (joint filers). Above those income ranges
($34,000 for a single filer and $44,000 for joint filers), up to 85 percent of Social Security
benefits are subject to federal income tax.
379

The estimate of forgone revenue shown above represents the incremental revenue loss resulting
from the Districts decision to exempt the Social Security benefits of retired workers that are
subject to federal taxation. There are 29 other states that provide a full exemption of Social
Security benefits from taxation, including Maryland and Virginia.
380

PURPOSE: The purpose of the subtraction is to shield Social Security benefits from taxation and
ensure that Social Security provides adequate income support to the elderly during their
retirement.

IMPACT: Retired Social Security recipients benefit from this provision. Because D.C. taxpayers
report railroad retirement and all types of Social Security income (for retirees, survivors and
dependents, and the disabled) on the same line of the income tax form, there are no data on the
subtraction for Social Security retirement benefits by income level.

The table on the following page shows the aggregate distribution of Social Security and railroad
retirement subtractions by income group. Nevertheless, because almost two-thirds of the Social
Security recipients in the District are retirees and the number of railroad retirement beneficiaries
in the District is small (approximately 500), the distribution suggests that taxpayers with incomes
of $100,000 or less claim the bulk of the benefits of the subtraction. As of December 2012, there

379
Provisional income consists of federal adjusted gross income, tax-exempt interest, some foreign-source
income, and one-half of Social Security benefits.

380
Wisconsin Legislative Fiscal Bureau, pp. 3, 31, 54.

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Page 201
were 50,090 retired workers, 1,720 spouses of retired workers, and 857 children of retired
workers receiving Social Security benefits in the District of Columbia.
381

The table below shows that 22,210 tax filers claimed the subtraction for Social Security or
Railroad Retirement benefits in 2011. The number is lower than the numbers of recipients cited
in the previous paragraph because those figures include all household members rather than tax
filing units.

($ in '000s)
Share
Breakeven or Loss 242
1% $2,985 1%
$1 to $25,000 3713
17% $15,977 6%
$25,001 to $50,000 7020
32% $62,303 23%
$50,001 to $75,000 3520
16% $47,190 17%
75,001 to $100,000 2058
9% $31,096 11%
$100,001 to $150,000 2223
10% $39,473 14%
$150,001 to $200,000 1151
5% $22,474 8%
$200,001 to $500,000 1686
8% $39,146 14%
Over $500,000 597
3% $14,991 5%
Total
22,210 100% $275,635 100%
Social Security and Railroad Retirement Benefits -- 2011

Note: The table shows the income levels of Social Security beneficiaries (old-age, survivors and
dependents, and disaiblity benefits) as well as Railroad Retirement beneficiaries in 2011. Approximately
two-thirds of these beneficiaries are Social Security old-age (retired worker) beneficiaries.

381
U.S. Social Security Administration, OASDI Beneficiaries by State and County, 2012 (Washington,
D.C.: June 2013), SSA Publication No. 13-11954, p. 2.
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Page 202
Income Tax
Subtractions

129. Social Security benefits for survivors and dependents

Sunset Date: None
Year Enacted: 1985
Total
Total $2,142 $2,196 $2,274 $2,359

more generous than the federal treatment of Social Security benefits. Under federal law, up to 50
percent of Social Security benefits are taxable for taxpayers with provisional income between
$25,000 and $34,000 (single filers) or $32,000 and $44,000 (joint filers). Above those income
ranges ($34,000 for a single filer and $44,000 for joint filers), up to 85 percent of Social Security
382

from the Districts decision to exempt the Social Security benefits of survivors and dependents
that are subject to federal taxation.

There are 29 other states that provide a full exemption of Social Security benefits from taxation,
including Maryland and Virginia.
383

PURPOSE: The purpose of the exclusion is to shield Social Security benefits from taxation and
ensure that Social Security provides adequate income support to dependents and survivors.

IMPACT: Survivors and dependents who receive Social Security benefit from this provision. As
of December 2012, there were 8,476 survivors receiving Social Security benefits in the District of
Columbia.
384

Because D.C. taxpayers report railroad retirement and all types of Social Security income (for
retirees, survivors and dependents, and the disabled) on the same line of the income tax form,
there are no data on the subtraction for Social Security survivors and dependents benefits by
income level.

382

383

384
U.S. Social Security Administration, OASDI Beneficiaries by State and County, 2012, p. 2.
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Page 203
Income Tax
Subtractions

130. Social Security benefits for the disabled
C
Sunset Date: None
Year Enacted: 1985

Total $4,190 $4,296 $4,449 $4,615

more generous than the federal treatment of Social Security benefits. Under federal law, up to 50
percent of Social Security benefits are taxable for taxpayers with provisional income between
$25,000 and $34,000 (single filers) or $32,000 and $44,000 (joint filers). Above those income
ranges ($34,000 for a single filer and $44,000 for joint filers), up to 85 percent of Social Security
385

from the Districts decision to exempt the Social Security disability benefits that are subject to
federal taxation.

There are 29 other states that provide a full exemption of Social Security benefits from taxation,
including Maryland and Virginia.
386

PURPOSE: The purpose of the exclusion is to shield Social Security benefits from taxation and
ensure that Social Security provides adequate income support to people with disabilities.

IMPACT: Social Security recipients with disabilities benefit from this provision. As of
December 2012, there were 14,183 disabled workers, 41 spouses of disabled workers, and 1,910
children of disabled workers receiving Social Security benefits in the District of Columbia.
387

Because D.C. taxpayers report railroad retirement and all types of Social Security income (for
retirees, survivors and dependents, and the disabled) on the same line of the income tax form,
there are no data on the subtraction for Social Security disability benefits by income level.

385

386

387
U.S. Social Security Administration, OASDI Beneficiaries by State and County, 2012, p. 2.
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Page 204
Income Tax
Subtractions

131. Environmental savings account contributions and earnings

Sunset Date: None
Year Enacted: 2001
Cl Total
Business Income Tax Loss minimal minimal minimal minimal
Note: Minimal means that the forgone revenue is estimated as less than $50,000 per year, although
precise data are lacking.

DESCRIPTION: An individual, partnership, corporation, trust, or government agency may
establish an environmental savings account (ESA) in order to accumulate funds for the cleanup or
redevelopment of brownfields, which are defined as abandoned, idled property or industrial
property where expansion or redevelopment is complicated by actual or perceived environmental
contamination.
388
Funds deposited in an ESA, and the interest earned on the funds, are exempt
from District of Columbia income tax. Any funds that are withdrawn and not used for the
cleanup and redevelopment of a contaminated property will be subject to the income tax and a 10
percent penalty.

A review did not identify similar income tax incentives offered by Maryland or Virginia, but
Maryland authorizes local governments to provide property tax credits equal to 50 to 70 percent
of the increase in property taxes for property owners who participate in the states Voluntary
Cleanup Program. The tax credits may be granted for five years, or 10 years if the property is in
an enterprise zone. Montgomery County and Baltimore City are among the jurisdictions that
offer the property tax credits.

PURPOSE: The purpose of the subsidy is to provide incentives for individuals and organizations
to clean up brownfields voluntarily, which would in turn reduce public health risks and promote
economic development by encouraging the reuse of contaminated properties.

IMPACT: Owners of property that is contaminated by hazardous substances may benefit from
this provision. The subtraction would be claimed on a line of the tax form that includes other
subtractions; therefore, there are no data on use of the provision or associated revenue loss.
Discussions with officials in the D.C. Department of the Environment and environmental groups
did not reveal any evidence that the accounts are being used. Therefore, the revenue loss for
fiscal years 2014 through 2017 is estimated as minimal (less than $50,000 per year).

388
See D.C. Official Code 8-631.02(2).

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Page 205
Income Tax
Subtractions

132. Rental assistance to police officers

District of Columbia Code: D.C. Official Code 42-2902
Sunset Date: None
Year Enacted: 1993
Total

DESCRIPTION: Metropolitan Police Department (MPD) officers are eligible to receive
discounted rent from public and private housing providers in the District of Columbia. The D.C.
Housing Authority (DCHA) is also required by law to offer public housing units at a discounted
rent to MPD officers, with priority given to officers who already live in the District. The
discounted rent received by officers is not counted as income in calculating District of Columbia
income tax liability.

An officer who receives discounted rent must notify the Chief of Police of the terms of the
discount and provide a copy of the lease or written agreement detailing the terms of the housing
rental.

A review did not identify similar provisions offered in Maryland or Virginia.

PURPOSE: The purpose of this provision is to encourage MPD officers to live in the District of
Columbia, particularly in public housing, and thereby promote safety and security in the
communities where they live. The report on the legislation by the Councils Committee on
Housing stated that, Effective community policing requires a police presence in our community
Police officers who live in our community serve as a positive role model for our children,
build a closer rapport with our residents, and their mere presence increases public safety.
389

IMPACT: MPD officers, and the communities where they reside, are the intended beneficiaries
of this provision. According to DCHA, three MPD officers lived at DCHA properties and
received discounted rent in 2013, but no data were available on the number of officers receiving
the benefit at private properties. The estimated revenue loss is minimal (less than $50,000 per
year) because of the low utilization of this provision.

389
Council of the District of Columbia, Committee on Housing, Report on Bill 10-325, the District of
Columbia Metropolitan Police Housing Assistance Program and Community Safety Act of 1993, July 20,
1993, p. 2.
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Page 206
Income Tax
Subtractions

133. Compensatory damages awarded in a discrimination case

District of Columbia Code: D.C. Official Code 47-1803.02(a)(2)(U)
Sunset Date: None
Year Enacted: 2002
Total
Total $31 $32 $33 $34

DESCRIPTION: A taxpayer may exclude from District of Columbia gross income a court award
intended to compensate him or her for the pain and suffering associated with unlawful
employment discrimination. The exclusion does not apply to back pay, front pay (future wages),
or punitive damages.
390
A review did not identify similar provisions offered in Maryland or
Virginia.

PURPOSE: The purpose of the subtraction is to preserve the full value of the awards that are
intended to compensate individuals for the pain and suffering associated with unlawful
employment discrimination.

IMPACT: Individuals who have won an employment discrimination suit or received a monetary
settlement of an employment discrimination claim benefit from this provision. During tax year
2008 (the last year for which data were collected), 36 tax filers who were distributed fairly evenly
across the income scale, claimed the subtraction.

390
D.C. law provides that damages pertaining to back pay and front pay are to be averaged over the period
of back and future wages involved. This spreading of back pay and front pay protects the taxpayers from
having to pay a large lump sum in taxes in one year, and avoids the perverse result in which a taxpayer
could be pushed into a higher tax bracket due to the award of back pay and front pay.
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Page 207
Income Tax
Subtractions

134. Poverty lawyer loan assistance

District of Columbia Code: D.C. Official Code 47-1803.02(a)(2)(X)
Sunset Date: None
Year Enacted: 2007
Total
Total $40 $40 $40 $40

DESCRIPTION: Loans that are awarded and subsequently forgiven through the District of
Columbia Poverty Lawyer Loan Assistance Repayment Program (LRAP) can be excluded from
District of Columbia gross income.

LRAP is intended to encourage law students and attorneys to practice in areas of civil law
deemed to serve the public interest. Participants who practice law in the designated areas, live in
the District of Columbia, have an annual adjusted gross income of less than $77,250,
391
and
exhaust all other loan assistance opportunities can receive loans to repay the debt incurred while
obtaining a law degree. The loans are forgiven when the participant completes his or her service
obligation. The maximum amount of loan repayment assistance is $1,000 per month and $60,000
per participant.

The District of Columbia Bar Foundation administers LRAP on behalf of the Deputy Mayor for
Public Safety and Justice, who oversees the program. The Bar Foundation determines which
areas of legal practice qualify for LRAP. According to the Bar Foundation, the average
participant in 2013 owed $135,000 in educational debt and had a salary of $51,220. The average
LRAP award in 2013 was $4,747.
392

PURPOSE: The purpose of this subtraction is to encourage attorneys to enter public-interest
work and thereby expand access to legal services for low-income residents.

IMPACT: LRAP participants benefit from this provision, as do the organizations and clients who
receive legal services from the participants. During tax year 2008 (the last year for which data
were available), 35 tax filers claimed the subtraction. Organizations that have employed program
participants include the Legal Aid Society of the District of Columbia, Legal Counsel for the
Elderly, the Washington Legal Clinic for the Homeless, and the Whitman-Walker Health Legal
Services Program.

391
The income ceiling will be increased by 3 percent on October 1 of each year. The next increase will
take effect on October 1, 2014. See D.C. Official Code 4-1704.03(4).

392
These data are from www.dcbarfoundation.org.
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Page 208
Income Tax
Credits

135. Economic development zone incentives for businesses

District of Columbia Code: D.C. Official Code 6-1501, 6-1502, 6-1504, and
47-1807.06
Sunset Date: None
Year Enacted: 1988
l Total
Total $0 $0 $0 $0

DESCRIPTION: D.C. law designates three economic development zones that are eligible for tax
and other development incentives: the Alabama Avenue zone, the D.C. Village zone, and the
Anacostia zone. The Mayor may also designate additional economic development zones (subject
to Council approval), based on evidence of economic distress such as high levels of poverty, high
levels of unemployment, low income, population loss, and other criteria set forth in the law.

A business entity that is located within an economic development zone is eligible for corporate
franchise tax credits or unincorporated business franchise tax credits if (1) the business has signed
a First Source agreement with the D.C. government pledging that 51 percent of new hires shall
be D.C. residents, and (2) the business is subject to the D.C. franchise tax.

The available credits include (1) a credit equal to 50 percent of wages paid to low-income
workers who are D.C. residents, up to a maximum of $7,500 per employee per year, (2) a credit
equal to 50 percent of the workers compensation premiums paid on behalf of workers who are
D.C. residents, and (3) a rent credit for businesses that rent space to a non-profit child care center.
The value of the rent credit is equal to the difference between the fair market value for the space
and the actual rent charged to the child care center. If the rent credit exceeds the tax liability of a
business, it can carry the credit backward or forward for up to five years.

The Mayor must submit and the Council must approve a resolution that qualifies the business for
the incentives. The resolution must identify the business, specify the types of incentives to be
granted, and estimate the annual dollar value of each franchise tax credit.

In 1997, the federal government established an enterprise zone in the District of Columbia, which
provided businesses operating in the zone with federal wage tax credits, expensing and capital
gains tax benefits, and tax-exempt bond financing. The authorization for the federal enterprise
zone expired on December 31, 2011.

Maryland provides income tax credits for each new worker hired by a business in any of 30
enterprise zones and also allows localities to offer real property tax credits for a portion of any
property improvements made by a business in an enterprise zone.
393
Businesses that locate in the

393
The income tax credits are $1,000 for each new worker but the credit rises to $6,000 for each of three
years if the worker is economically disadvantaged. The real property tax credits equal 80 percent of the
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Page 209
Baltimore City or Prince Georges County zones are eligible for larger property and income tax
credits, as well as personal property tax credits. Virginia replaced its enterprise zone tax credits
with a grant program.

PURPOSE: The purpose of the incentives is to promote economic development in
neighborhoods in economic distress, and to increase the employment of low-income D.C.
residents.

IMPACT: Businesses located in an economic development zone are eligible to benefit from these
incentives, as are low-income residents. Nevertheless, only two incentive packages have been
approved since the economic development zones were created, and neither package included
business tax incentives (both packages included real property tax incentives).

increased tax liability resulting from property improvements for the first five years, and are then phased out
over the next five years.
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Income Tax
Credits

136. Qualified high-technology companies: business income tax
exemption and reduction

Sunset Date: None
Year Enacted: 2001
Total
Business Income Tax Loss $15,983 $16,777 $17,491 $18,310
Total $15,983 $16,777 $17,491 $18,310
Note: The estimated revenue loss shown in the table above covers all of the business tax credits available to
qualified high-technology companies (QHTCs) because they are combined into one sum in the Districts
tax database. In other words, the revenue loss applies to this tax expenditure as well as #137 - #140.

DESCRIPTION: High-technology companies are eligible for a credit that eliminates business
franchise taxes for five years and thereafter reduces the rate to 6 percent. The general tax rate for
the corporation and the unincorporated business franchise taxes is 9.975 percent.

For a business that was certified as a qualified high-technology company (QHTC) before January
1, 2012, the five-year tax exemption begins when the company commenced business in the
District of Columbia. For a business that was certified as a QHTC on or after January 1, 2012,
the five-year tax exemption is applicable from the date that the company has taxable income. The
total amount of exemptions that a QHTC may receive shall not exceed $15 million.

and hardware; and advanced materials and processing technologies. The business tax credits are
part of a package of incentives for high-technology firms authorized by D.C. Law 13-256, the
New E-conomy Transformation Act of 2000.
394

Neither Maryland nor Virginia offers a comparable business tax reduction, but each state offers
an array of incentives to technology firms which are described under tax expenditure #115,
Qualified high-technology companies: depreciable business assets.

PURPOSE: The purpose of the credit is to encourage high-technology firms to locate, expand,
and stay in the District of Columbia, thereby strengthening the employment and economic base.

IMPACT: Qualified high-technology companies benefit from the tax credit, although there could
also be spillover benefits in terms of greater employment and business activity. In tax year 2011,

394
The other incentives, which include special depreciation rules, employment credits, property tax
abatements, sales tax exemptions, and personal property tax exemptions, are discussed elsewhere in this
section.

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77 companies qualified for the credit. The credit violates the principle of horizontal equity
because firms in other industries do not receive similar tax relief.

The estimated revenue loss shown in the table on the previous page covers all of the business tax
credits available to qualified high-technology companies (QHTCs) because they are combined
into one sum in the Districts tax database. In other words, the revenue loss applies to this tax
expenditure as well as tax expenditures #137 - #140, which are described on the following pages.
Nevertheless, the bulk of the revenue loss derives from the business income tax exemption and
reduction, which is much more broad-based than the other business tax expenditures for QHTCs.
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Income Tax
Credits

137. Qualified high-technology companies: employee relocation
incentives

Sunset Date: None
Year Enacted: 2001
l Total
Business Income Tax Loss included in
#136
included in
#136
included in
#136
included in
#136
Total included in
#136
included in
#136
included in
#136
included in
#136

DESCRIPTION: A qualified high-technology company
395
is authorized to claim business tax
credits for the relocation costs paid to, or on behalf of, a qualified employee
396
to reimburse actual
moving expenses, to assist in financing the purchase of a home, or pay for the required security
deposit or lease payments for the first year of a lease. The credit may not exceed $5,000 per
taxable year for each employee relocated to the District from another state, or $7,500 per taxable
year for each employee relocated to the District from another state if the employee also relocates
his or her principal residence into the District.

A company may not claim the credit until it has relocated at least two qualified employees and
employed them for at least six months in the District. The credit is not available for employees
who work less than 35 hours per week, and the company may not claim the credit if it has
claimed a deduction for the relocation costs. If the amount of the credit exceeds the amount
otherwise due, a company may carry forward the unused amount of the credit for 10 years.

The employment relocation credits are part of a package of incentives for high-technology firms
authorized by D.C. Law 13-256, the New E-conomy Transformation Act of 2000.
397
Neither
Maryland nor Virginia offers relocation credits, but each state offers an array of incentives to
technology firms which are described under tax expenditure #115, Qualified high-technology
companies: depreciable business assets.

395
A qualified high-technology company must(1) have two or more employees in the District, and (2)
derive at least 51 percent of gross revenues earned in the District from technology-related goods and
services such as Internet-related services and sales; information and communication technologies,
equipment and systems that involve advanced computer software and hardware; and advanced materials
and processing technologies.

396
A qualified employee is someone who is employed in the District of Columbia by a high-technology
company.

397
The other incentives, which include increased expensing of capital assets, a reduced corporate tax rate,
property tax abatements, sales tax exemptions, and personal property tax exemptions, are discussed
elsewhere in this section.

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Page 213

PURPOSE: The purpose of the credit is to encourage high-technology companies to relocate,
expand, and stay in the District of Columbia by ensuring that they can relocate key employees. In
turn, the growth of the high-technology industry is intended to strengthen the Districts economic
and employment base.

IMPACT: High-technology companies, and their employees who relocate to the District of
Columbia, benefit from this provision. There may also be spillover benefits in terms of greater
employment and business activity. However, the credit violates the principle of horizontal equity
because firms in other industries with equivalent levels of income are not eligible for similar tax
relief.

There is no separate estimate of forgone revenue for this credit because QHTC credits are
combined into one sum in the tax database. The bulk of the credits reflect the preferential
business tax rates offered to QHTCs (see tax expenditure #136).

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Income Tax
Credits

138. Qualified high-technology companies: employment incentives

Sunset Date: None
Year Enacted: 2001
Cl Total
#136
included in
#136
included in
#136
included in
#136
Total included in
#136
included in
#136
included in
#136
included in
#136

DESCRIPTION: A qualified high technology company is allowed a credit against its business
tax liability equal to 10 percent of the wages paid during the first 24 calendar months of
employment to a qualified employee hired after December 31, 2000. The credit for each
qualified employee may not exceed $5,000 per taxable year. If the credit exceeds the amount of
tax otherwise due from a high-technology company, the unused amount of the credit may be
carried forward for 10 years.

and hardware; and advanced materials and processing technologies. A qualified employee is a
person who is employed in the District of Columbia by a qualified high-technology company.

The employment credits are part of a package of incentives for high-technology firms authorized
by D.C. Law 13-256, the New E-conomy Transformation Act of 2000.
398

Maryland offers a job creation tax credit for firms that create at least 60 new jobs (25 in a
priority funding area), as well as tax credits for hiring people with disabilities, but these
incentives are not specific to the high-technology sector (or any other sector). Virginia provides a
major business facility tax credit for firms that create at least 50 new jobs (25 new jobs for firms
in economically distressed areas or enterprise zones) relative to a base year, as well as a green job
creation tax credit and a clean fuel vehicle job creation tax credit, but once again, the incentives
are not targeted at the high-technology sector.

PURPOSE: The purpose of the credit is to encourage the growth of high-technology industries
and high-technology employment in the District of Columbia, and thereby strengthen the
Districts economic base.

398

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There may also be spillover benefits in terms of greater employment and business activity.
However, the credit violates the principle of horizontal equity because firms in other industries
with equivalent levels of income are not eligible for similar tax relief.


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Page 216
Income Tax
Credits

139. Qualified high-technology companies: incentives to employ
disadvantaged workers

Sunset Date: None
Year Enacted: 2001
Cl Total
#136
included in
#136
included in
#136
included in
#136
Total included in
#136
included in
#136
included in
#136
included in
#136

DESCRIPTION: A qualified high technology company may take credits against its franchise tax
liability equal to 50 percent of the wages paid to a qualified disadvantaged employee during the
first 24 calendar months of employment. The credit may not exceed $15,000 in a taxable year for
each disadvantaged employee, and the credit is not allowable if the company accords the
qualified employee lesser benefits or rights than it accords other employees in similar jobs. If the
amount of the allowable credit exceeds the tax otherwise due, the company may carry forward the
unused amount of the credit for 10 years.

A qualified disadvantaged employee refers to a District of Columbia resident who is receiving
benefits from the Temporary Assistance to Needy Families (TANF) program; was a recipient of
TANF in the period immediately preceding employment; was released from incarceration within
24 months of being hired by a qualified high-technology company; or qualifies for the Welfare-
to-Work Tax Credit or the Work Opportunity Tax Credit under the U.S. Internal Revenue Code.

and hardware; and advanced materials and processing technologies. The employment credits are
399

Maryland offers tax credits to employers who hire people with disabilities, but this incentive is
not specific to the high-technology sector (or to any other sector). Virginia provides a tax credit
of up to $750 for hiring TANF recipients (for businesses with 100 employees or less), but once
again the incentive is not limited to the high-technology sector.

399

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PURPOSE: The purpose of the credit is to encourage high-technology companies to employ and
retain disadvantaged workers.

IMPACT: Disadvantaged workers in the District of Columbia benefit from this tax credit, as do
high-technology companies that employ the workers. However, the credit violates the principle
of horizontal equity because firms in other industries with equivalent levels of income are not
eligible for similar tax relief.


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Page 218
Income Tax
Credits

140. Qualified high-technology companies: incentives to retrain
disadvantaged workers

Sunset Date: None
Year Enacted: 2001C
l Total
#136
included in
#136
included in
#136
included in
#136
Total included in
#136
included in
#136
included in
#136
included in
#136

DESCRIPTION: A qualified high technology company may take a credit against its franchise tax
liability for the expenditures paid or incurred during the taxable year for retraining a qualified
disadvantaged employee. The credit cannot exceed $20,000 for each qualified disadvantaged
worker during the first 18 months of employment. If the credit exceeds the amount of tax
otherwise due from the company, the unused amount of the credit may be carried forward for 10
years, or can be taken as a refundable credit in an amount up to 50 percent of the credit.

A qualified disadvantaged employee refers to a District of Columbia resident who is receiving
benefits from the Temporary Assistance to Needy Families (TANF) program; was a recipient of
TANF in the period immediately preceding employment; was released from incarceration within
24 months of being hired by a qualified high-technology company; or qualifies for the Welfare-
to-Work Tax Credit or the Work Opportunity Tax Credit under the U.S. Internal Revenue Code.

and hardware; and advanced materials and processing technologies. The retraining credits are
400

Virginia provides a non-refundable worker retraining tax credit of up to 30 percent of the costs of
non-credit courses at an in-state community college or private school,
401
but the incentive is not
targeted at the high-technology sector or at disadvantaged workers. Maryland does not provide
tax incentives for worker retraining.

400

401
For classes taken at a private school, Virginia limits the annual credit to $200 per student ($300 per
student if the student is undergoing training in science, technology, engineering, or mathematics).
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PURPOSE: The purpose of the credit is to encourage high-technology companies to invest in the
skills of disadvantaged workers and thereby to help disadvantaged workers attain better jobs with
higher wages and more potential for advancement within the high-technology sector.

IMPACT: Disadvantaged workers in the District of Columbia benefit from this tax credit, as do
high-technology companies that employ the workers. However, the credit violates the principle
of horizontal equity because firms in other industries with equivalent levels of income (and
training costs) are not eligible for similar tax relief.


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Income Tax
Credits

141. Qualified social electronic commerce companies

District of Columbia Code: D.C. Official Code 47-1818.01 - 47-1818.08
Sunset Date: None
Year Enacted: 2012C2012
l Total
Business Income Tax Loss $0 $0 $1,440 $1,500
Total $0 $0 $1,440 $1,500

DESCRIPTION: A qualified social e-commerce company is eligible for business tax credits over
a five-year period beginning in FY 2016, based on its performance in hiring D.C residents. To
qualify, a company must be a qualified high-technology company (QHTC) that hired at least 850
employees to work in the District of Columbia between December 31, 2009, and January 1, 2012,
and that is engaged primarily in the business of marketing or the promoting of retail or service
businesses by delivering or providing members or users with access to discounts or other
commerce-based benefits.
402

If at least half of the companys hires in FY 2015 are D.C. residents and that level of hiring is
maintained in subsequent years, the total credit could reach $17.5 million. The maximum credit
is capped at $13.125 million if between 40 and 50 percent of hires are D.C. residents in FY 2015,
and $9 million if less than 40 percent of hires are D.C. residents. The same level of hiring D.C.
residents must be maintained through the end of the abatement period.

The qualified social e-commerce company must also meet the following conditions: (1) hire at
least 50 new employees annually, (2) employ at least 1,000 persons in the District from the start
of FY 2016 through the end of the five-year credit period, (3) develop a joint business activity
with the Deputy Mayor for Planning and Economic Development to provide assistance to small
businesses, train software developers, and provide students with summer jobs, (4) occupy real
property of at least 200,000 square feet that has been constructed as its primary corporate
headquarters after June 1, 2012, and (5) not file for bankruptcy. If any of the first three criteria
are not met, the firm is not eligible for the tax credits during the period of non-compliance. If
either of the final two criteria is not met, the firms credit eligibility is terminated.

A QHTC must (1) have two or more employees in the District, and (2) derive at least 51 percent
of gross revenues earned in the District from specified technology-related goods and services
such as Internet-related services and sales; information and communication technologies,
equipment and systems that involve advanced computer software and hardware; and advanced
materials and processing technologies.

A qualified social e-commerce company may not claim any of the other tax credits or abatements
for business income tax or real property tax that can be claimed by QHTCs.

402
See D.C. Official Code 47-1818.01(7)(B).
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Page 221
PURPOSE: According to the D.C. Council Committee on Finance and Revenues report on the
authorizing legislation, the purpose of the credits is to encourage LivingSocial to locate its
headquarters in the District and to hire District residents.
403
LivingSocial is a privately-held,
D.C.-based company. As of June 2012, LivingSocial had 65 million subscribers and 5,000
employees worldwide, including 1,000 employees in the District.
404

The Committee on Finance and Revenue also stated that, Although LivingSocial qualifies as a
QHTC, however, it is currently unable to benefit from tax advantages such as wage tax credits
and corporate franchise tax exemptions, as it has not yet generated taxable income.
405

IMPACT: The estimated revenue loss for FY 2015 and FY 2016 shown on the previous page is
based on the average corporate franchise tax collections from the top 20 companies in the
District. This benchmark was used to reflect a scenario in which LivingSocial grows at a rate in
which the total credit amount could be claimed by FY 2020.

In an analysis of the incentives required by D.C. law, the Office of the Chief Financial Officer
stated that, Research indicates that tax incentives are generally not a critical factor in corporate
locational decisions. Without fully understanding the criteria LivingSocial is using to make its
locational decisions or knowing which other cities are in contention, the OCFO cannot opine
definitively on the necessity or value of the subsidies. However, the $32.5 million in potential
subsidies proposed in the Act may be necessary to induce LivingSocial to locate its new
headquarters in the District and, therefore, entice new residents and create new jobs for District
residents.
406

403
Social E-Commerce Job Creation Tax Incentive Act of 2012, June 13, 2012, pp. 1-2.

404
Committee on Finance and Revenue, p. 2.

405

406
Office of the Chief Financial Officer, Tax Abatement Analysis: Social E-Commerce Job Creation Tax
Incentive Act of 2012, dated May 22, 2012.
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Income Tax
Credits

142. First-time home purchase for D.C. government employees

Sunset Date: None
Year Enacted: 2000
Cl Total
Total $124 $124 $124 $124

DESCRIPTION: District government employees and public charter school employees, as well as
individuals who have accepted an offer to serve as a District of Columbia police officer,
firefighter, emergency medical technician, public school teacher, or public charter school teacher,
are eligible for a $2,000 income tax credit in the year that they buy a home in the District and the
following four years. To receive the credit, the individual must be a first-time homebuyer in the
District and remain a District of Columbia resident. Any portion of the credit that is not used in a
tax year cannot be carried forward, carried back, or refunded.

When first-time homebuyer credits were first authorized in 2000, only police officers were
eligible, but the law was amended in 2007 to include the other groups of employees listed above.
A review did not identify any similar homeownership benefits for government employees in
Maryland or Virginia.

former Mayor Anthony Williams, recommended repealing the first-time homebuyer credit for
D.C. government employees. The Commission contended that repealing this tax expenditure
(and several others) would promote horizontal equity and that tax relief targeted to particular
activities or groups would be less necessary if the Commissions proposal to increase the standard
deduction and personal exemption were adopted.
407

PURPOSE: The purpose of the credit is to aid in the recruitment and retention of highly qualified
employees (particularly teachers, police officers, firefighters, and emergency medical
technicians); to strengthen the District of Columbias economic and tax base; and to encourage
employees to live in the District and become engaged in its civic and neighborhood life.

IMPACT: District government employees, as well as individuals who have accepted an offer to
serve as a District of Columbia police officer, firefighter, emergency medical technician, or
teacher, benefit from this tax credit. As noted above, there may also be spillover benefits for
District of Columbia neighborhoods and the District economy. Although the credit could aid in
efforts to recruit highly-qualified employees, the forgone revenue could also have been used to
increase employee pay or benefits. The credit violates the principle of horizontal equity because
only some groups of new homebuyers are eligible.

407

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Page 223
During tax year 2009, 58 tax filers claimed the credit. As shown in the table below, the benefits
were concentrated on middle-income households. Tax filers with incomes from $25,001 to
$75,000 claimed 62 percent of the benefits.

($ in 000s)
Share
$1 to $25,000 5 9% $10 9%
$25,001 to $50,000 17 29% $34 29%
$50,001 to $75,000 19 33% $38 33%
$75,001 to $100,000 7 12% $14 12%
$100,001 to $150,000 8 14% $16 14%
$150,001 to $200,000 1 2% $2 2%
Over $200,000 1 2% $2 2%
Total 58 100% $116 100%
First-Time Home Purchase for D.C. Government Employees -- 2009
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Income Tax
Credits

143. Job growth tax credit

District of Columbia Code: D.C. Official Code 47-1807.09, 47-1807.51 - 47-1807.56
Sunset Date: January 1, 2030
Year Enacted: 2010
Total $0 $0 $0 $0

DESCRIPTION: The Mayor has the authority to issue job growth tax credits against the
franchise tax for business projects
408
that meet the following criteria: (1) add at least 10 net new
jobs in the District of Columbia with an average yearly wage of at least 120 percent of the
average yearly wage of D.C. residents, (2) increase income and payroll tax revenue for the
District of Columbia, (3) retain any new positions for at least one year, and (4) pass a but-for
test establishing that the project would not have occurred in the absence of the job growth tax
credit. The credits would be awarded in the order of priority received and cannot exceed an
amount allocated in the Districts annual budget and financial plan. Nevertheless, the authority to
award the credits has not been used and there was no appropriation for the credits in the Districts
proposed FY 2015 budget.

Although the tax credits may be awarded only through tax year 2014, the act has a sunset date of
January 1, 2030. The unused amount of a job growth tax credit which results when the credit
exceeds annual tax liability can be carried forward for 10 years.

Employers must submit a written application for a job growth tax credit, which must be approved
by the Mayor, before a project commences in the District of Columbia. The application must
describe the project as well as the jobs that will be created and the anticipated salary range, and
provide documentation to meet the but-for test. The authorizing statute provides a formula for the
Mayor to determine a maximum credit for the life of the project as well as an annual credit equal
to 50 percent of a firms Social Security payroll tax paid that year for new employees who are
D.C. residents. Unused credits may be carried over for a period of as long as 10 years.

Maryland offers job creation tax credits to firms that are expanding in or relocating to Maryland.
To qualify for the credits, a business must have created at least 60 new, full-time jobs during a
24-month period (the threshold drops to 25 new, full-time jobs in designated priority funding
areas). Firms that qualify can claim credits equal to 2.5 percent of aggregate annual wages for all
newly-created, full-time jobs, up to a maximum of $1,000 per new job, except in targeted areas
where the credit is larger (5 percent of annual wages, up to $1,500 per new job). A firms total
credits cannot exceed $1 million per year, but excess credits can be carried forward for five years.

408
A project is defined as any business project that encourages, promotes, and stimulates economic
development in key economic sectors and that is approved by the Mayor as specified in 47-1807.54.
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Page 225
Virginia offers major business facility tax credits of $1,000 per job created to firms that create at
least 50 new full-time jobs by establishing or expanding a business facility in the state (the
threshold is 25 new full-time jobs in areas designated as economically distressed). The credits are
earned in increments over a two-year period (the time frame will increase to three years in tax
year 2015) and credits can be recaptured proportionately if employment decreases during the five
years following the initial credit year. Unused credits can be carried forward for 10 years.

PURPOSE: The purpose of the credit is to create a broad-based incentive for businesses to start
new projects in the District of Columbia that will increase employment among D.C. residents.

IMPACT: Although firms that increase their hiring would be the immediate beneficiaries of the
credit, District residents would be the ultimate beneficiaries if the credit stimulated higher
employment and tax revenue.

Two academic experts on job tax credits, Timothy Bartik and John Bishop, contend that such
credits should be simple: easy for employers to understand, easy for employers who are actually
expanding payroll to claim, and easy to administer. Second, the credit should be stringent: it
should be difficult for employers to claim the credit unless they are actually expanding
employment and payroll (emphasis in the original).
409

No revenue loss is estimated for FY 2014 and subsequent years because funds have not been
appropriated for the credit in the annual operating budget.

409
Timothy Bartik and John Bishop, The Job Tax Credit: Dismal Projections for Employment Call for a
Quick, Efficient, and Effective Response, Economic Policy Institute Briefing Paper, October 20, 2009,
available at www.epi.org, p. 12.
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Page 226
Income Tax
Credits

144. Paid leave for organ or bone marrow donors

District of Columbia Code: D.C. Official Code 47-1807.08 and 47-1808.08
Sunset Date: None
Year Enacted: 2006
Business Income Tax Loss no estimate no estimate no estimate no estimate
Total no estimate no estimate no estimate no estimate

DESCRIPTION: A business that provides its employees with a paid leave of absence to serve as
organ or bone marrow donors may claim a non-refundable credit equal to 25 percent of the
regular salary paid during the leave of absence, not to exceed 30 days for an organ donation and
seven days for a bone marrow donation.

To qualify for the credit, the leave provided by the business must be in addition to any medical,
personal, or other paid leave provided to the employee. In addition, the credit does not apply if
the employee is eligible for leave under the U.S. Family and Medical Leave Act of 1993. The
credit does not reduce the minimum tax liability for a business, and the business also cannot
deduct the salary paid to the employee during any period for which the paid leave is in effect.

Neither Maryland nor Virginia offers employer incentives to encourage organ or bone-marrow
donations. However, Virginia allows organ and tissue donors to take personal income tax
deductions of up to $5,000 (10,000 for joint filers) or the actual amount paid, whichever is less,
for unreimbursed medical expenses that have not been claimed as a medical deduction on the
taxpayers federal income taxes. In addition, Virginia allows taxpayers to deduct from their
taxable income the fee paid for an initial screening to become a bone-marrow donor, provided
that the individual was not reimbursed for the fee and did not claim a deduction for the fee on his
or her federal return.

PURPOSE: The purpose of the credit is to increase the number of private employers who allow
their employees paid leave to serve as organ and bone marrow donors.

IMPACT: Employers who provide their employees with paid leave to serve as organ or bone
marrow donors are the intended beneficiaries of this provision, which should also generate
indirect benefits by expanding the number of organ or bone marrow donors. There were two
claimants of this credit in tax year 2009.

The revenue loss for FY 2014-FY 2017 cannot be estimated, because ORA follows the policy of
the U.S. Internal Revenue Service providing that, No statistical tabulation may be released
outside the agency with cells containing data from fewer than three returns.
410
This policy is
intended to protect the confidentiality of individual tax records.

410
U.S. Internal Revenue Service, Publication 1075, Tax Information Security Guidelines for Federal,
State, and Local Agencies and Entities (January 2014), p. 116.
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Page 227
Income Tax
Credits

145. Employer-assisted home purchases

District of Columbia Code: D.C. Official Code 47-1807.07 and 47-1808.07
Sunset Date: None
Year Enacted: 2002
Business Income Tax Loss minimal minimal minimal minimal

DESCRIPTION: A business in the District of Columbia with at least one employee may receive
a tax credit equal to one-half of the amount of homeownership assistance provided to its
employees during the taxable year, provided that (1) the credit received for each employee shall
not exceed $2,500, (2) the assistance is provided through a certified employer-assisted home
purchase program, (3) the assistance is used for the purchase of a qualified residential real
property, and (4) the eligible employee is a new homebuyer (someone who did not own a
principal place of residence in the District in the prior 12 months).

To be eligible, an employee must have a household income less than or equal to 120 percent of
the area median income.

PURPOSE: The purpose of the credit is to leverage private-sector assistance for new
homeownership in the District of Columbia among low- to moderate-income individuals and
families. By providing a tax credit equal to 50 percent of the housing assistance provided by a
business, up to $2,500 annually for each year, the District has in effect created a matching
incentive for employer-assisted home purchases.

IMPACT: Low- to moderate-income taxpayers who are eligible for an employer-assisted home
purchase program benefit from this tax credit. There may also be spillover benefits in terms of a
stronger tax base for the District, increased demand for housing, and more stable neighborhoods.

The revenue loss from the credit is difficult to estimate because the Districts business tax forms
do not include a separate line for employer-assisted home purchases. Instead, the credit is
combined with other credits into a single line on the tax forms. Nevertheless, the estimated
revenue loss for FY 2014 to FY 2017 is characterized as minimal for several reasons. First,
two-thirds of D.C. corporate franchise taxpayers (66.9 percent in tax year 2009) and
unincorporated business taxpayers (65.4 percent in tax year 2009) pay the minimum tax and
cannot benefit from the credits.
411
In addition, the D.C. Association of Realtors indicates that
usage of the credits has been modest.

411
Office of the Chief Financial Officer, District of Columbia Data Book: Revenue and Economy
(September 2013), pp. 72-73.
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Page 228
Income Tax
Credits

146. Lower-income, long-term homeownership

District of Columbia Code: D.C. Official Code 47-1806.09 - 47-1806.09f
Sunset Date: None
Year Enacted: 2002
Total $4 $4 $4 $4

DESCRIPTION: The District offers a lower-income, long-term homeowner credit to residents
with a household income equal to or less than 50 percent of the area median income who own an
eligible residence (one that receives the homestead deduction) as a principal place of residence
and have resided in that home for at least seven consecutive years. Eligible homeowners get a
credit on their District of Columbia income tax equal to the difference between the current real
property tax bill and 105 percent of their real property tax bill in the prior year.

The credit is refundable, meaning that the taxpayer can get a check for any amount by which the
credit exceeds his or her income tax liability. Because household income determines eligibility,
this means that the income of anyone who shares the housing even someone who is unrelated to
the taxpayer counts toward the 50 percent median income cap. To claim the credit, taxpayers
must fill out Schedule L, the Lower Income Long-Term Homeowner Credit.

In tax year 2012, the household income limits ranged from $37,650 for a single-person household
to $70,950 for a household of eight people or more.

A review did not identify any tax relief provisions targeted at long-term homeowners in Maryland
or Virginia.

PURPOSE: The purpose of the credit is to protect lower-income, long-term homeowners in the
District of Columbia from rapid increases in real property taxes that could force them to sell their
homes and possibly to leave the District.

IMPACT: Lower-income, long-term homeowners in the District of Columbia benefit from this
provision. In tax year 2011, 70 tax filers claimed the credit. The credit violates the principle of
horizontal equity because lower-income homeowners who have not resided in the same home as a
principal place of residence for seven years do not qualify for similar tax relief.

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Income Tax
Credits

147. Property tax circuit breaker

Sunset Date: None
Year Enacted: 1977
Cl Total
Total $16,354 $16,853 $18,110 $19,088

DESCRIPTION: The Districts property tax circuit breaker program (also known as Schedule
H) has been revised substantially, effective in tax year 2014. The program allows low-income
homeowners and renters to claim a property tax credit that is applied to the taxpayers income tax
liability. To qualify, the taxpayer must have been a D.C. resident throughout the taxable year.
The credit is refundable; if the amount of the credit exceeds tax liability, the taxpayer receives the
excess amount in the form of a refund.

The annual income eligibility limit will rise from $20,000 in household income to $40,000 in
income per tax filing unit in tax years 2014 and 2015, and to $50,000 per tax filing unit in tax
year 2016 and subsequent years. The decision not to use household income to determine
eligibility is important because taxpayers will no longer have to count the income of anyone who
shares their housing even someone who is unrelated when applying for the program. Using
the income of the tax filing unit (a single person or a family, in essence) expands eligibility and
also reduces the administrative complexity of the program.

For homeowners, the credit equals the amount by which a homeowners property tax bill exceeds
a set percentage of household income (the relevant percentage varies with income), up to a
maximum amount that will rise from $750 to $1,000 beginning in tax year 2014. The maximum
credit will then be adjusted annually for inflation.

For renters, an imputed property tax payment is used to calculate his or her credit. The imputed
tax payment rose from 15 percent to 20 percent of total rent payments, beginning in tax year
2014. The renter receives a credit equal to the amount by which his or her imputed property tax
payment exceeds a percentage of household income, up to a maximum amount that will rise from
$750 to $1,000 beginning in tax year 2014. The maximum credit will then be adjusted annually
for inflation.

A separate formula for determining the benefits available to elderly, blind, or disabled taxpayers
has been eliminated as of tax year 2014. These taxpayers will now qualify for the property tax
circuit breaker on the same basis as other residents.

The program is known as a circuit breaker because it stops tax liability from increasing once it
reaches a certain percentage of income. According to the Lincoln Land Institute, all but 15 states
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Page 230
offered a circuit breaker program in 2009.
412
In many states, the circuit breaker is available only
to the elderly.

Maryland also offers a circuit breaker program. Homeowners with household income up to
$60,000 can claim a credit on taxes that result from the first $300,000 in assessed value. Renters
can also qualify for a credit of up to $750 based on the assumption that 15 percent of their rent is
used to pay property tax. Virginia does not have a circuit-breaker program.

PURPOSE: The purpose of the credit is to enhance income security for residents whose property
taxes are high relative to their income, such as elderly residents on fixed incomes. Although the
tax relief is provided through the income tax system, it is based on the amount by which an
individual or familys property tax bill exceeds a specified percentage of income.

IMPACT: Low- to moderate-income individuals and families who own or rent a home in the
District of Columbia that serves as their primary place of residence are the main beneficiaries of
this credit. During tax year 2011, 8,266 tax filers claimed the credit, but that number will rise
substantially as the eligibility expands and the maximum credit rises, beginning in tax year 2014.
As shown in the table, the credit has been targeted at low-income residents: 100 percent of the
credits were claimed by tax filers with incomes below $20,000 in 2011.

($ in 000s)
Share
Breakeven or Loss 1,209 15% $766 16%
$1 to $5,000 1,347 16% $816 17%
$5,001 to $10,000 1,731 21% $1,028 21%
$10,001 to $15,000 2,083 25% $1,190 25%
$15,001 to $20,000 1,896 23% $1,007 21%
Total 8,266 100% $4,807 100%
Property tax circuit breaker - 2011

412
Daphne Kenyon, Adam Langley, and Bethany Paquin, Property Tax Relief: The Case for Circuit
Breakers, Land Lines, Lincoln Institute of Land Policy (April 2010), p. 10.
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Income Tax
Credits

148. Earned income tax credit

District of Columbia Code: D.C. Official Code 47-1806.04(f)
Sunset Date: None
Year Enacted: 2000
Cl Total
Total $54,262 $54,967 $55,737 $56,461

DESCRIPTION: An individual who receives a federal earned income tax credit (EITC) is
eligible for a District of Columbia EITC equal to 40 percent of the federal credit. The credit is
refundable, meaning that if the taxpayers credit exceeds his or her D.C. income tax liability, he
or she receives the balance in the form of a refund.

Working families with children who have annual incomes below $38,000 to $52,000 (depending
on marital status and number of children) generally are eligible for the federal EITC. In addition,
low-income workers without children who have incomes below $14,000 ($20,000 for a married
couple) can receive a very small federal EITC.
413
The EITC has a phase-in range where the credit
increases along with earnings, then hits a plateau where the credit remains constant, and then has
a phase-out range where the credit falls to zero.

The American Recovery and Reinvestment Act (ARRA) of 2009 also revised the federal EITC by
providing a larger subsidy for families with three or more children and increasing benefits for
married couples in order to reduce a marriage penalty. Although the ARRA expansions were
originally adopted only for 2009 and 2010, Congress extended the provisions through the end of
tax year 2017. Those changes are mirrored in the D.C. EITC.

The D.C. EITC is also available to non-custodial parents between the ages of 18 and 30 who are
in compliance with a court order for child support payments. Because these taxpayers are not
eligible for the federal EITC, they must fill out an additional form (Schedule N, Non-Custodial
Parent EITC claim) to claim the D.C. EITC. Taxpayers cannot claim both the D.C. EITC and
the low-income credit (see tax expenditure #149 for a description of the low-income credit).

former Mayor Anthony Williams, recommended expanding the local EITC for childless workers
by calculating the credit at 100 percent of the federal credit for those claimants (rather than 40
percent) and phasing out the credit at higher income levels.
414

The majority of states (23 of 41) with a broad-based income tax also offer their own EITCs,
including Maryland and Virginia. The Districts 40 percent refundable EITC is the most

413
Center on Budget and Policy Priorities, Policy Basics: The Earned Income Tax Credit, September 6,
2011, available at www.cbpp.org.

414
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Page 232
generous in the nation.
415
Maryland offers taxpayers the choice of a 25 percent refundable EITC
or a 50 percent non-refundable EITC. Virginia provides a 20 percent non-refundable EITC.

Montgomery County, Maryland, is one of several localities to offer an EITC. Although
Montgomery Countys EITC was originally designed to equal the taxpayers state EITC, the
percentage was reduced due to budget shortfalls and is set at 85 percent for FY 2014. The county
EITC is scheduled to return to 100 percent of the state EITC in FY 2016.

PURPOSE: The purpose of the credit is to promote self-sufficiency among low-income workers,
thereby reducing poverty and welfare dependency.

IMPACT: Low-income individuals and families benefit from the credit. During tax year 2011,
56,036 tax filers claimed the D.C. EITC. Tax filers with income between $10,000 and $20,000
received 51 percent of the credits, as shown in the table below. This is consistent with the
structure of the credit, which reaches its maximum at an annual income of $9,560 for families
with one child and $13,430 for families with two or more children in 2013.

Researchers have found that the EITC leads to significant increases in employment among single
mothers while not reducing labor supply among those who were already in the labor market.
416

One estimate is that the EITC lifted 2.5 million children out of poverty nationwide in 2005, more
than any other government program.
417
Proponents also note that the EITC is easy to administer;
no additional bureaucracy is needed to deliver benefits. The Center on Budget and Policy
Priorities notes that, States with EITCs report very low administrative costs with the credit
typically less than 1 percent which means that nearly every dollar a state spends on the EITC
goes to the working families in need of help.
418

($ in 000s)
Share
$1 to $10,000 17,537 31.3% $10,037 18.8%
$10,001 to $20,000 19,764 35.3% $27,492 51.4%
$20,001 to $30,000 11,406 20.4% $12,537 23.5%
$30,001 to $40,000 6,034 10.8% $3,075 5.8%
Greater than $40,000 514 0.9% $121 0.2%
Total 56,036 100.0% $53,460 100.0%
Earned Income Tax Credit - 2011

415
Erica Williams and Michael Leachman, States Can Adopt or Expand Earned Income Tax Credits to
Build a Stronger Economy, Center on Budget and Policy Priorities, January 30, 2014, pp. 4-5.

416
Nada Eissa and Hilary Hoynes, Redistribution and Tax Expenditures: The Earned Income Tax Credit,
National Tax Journal (64)(2, Part 2), June 2011, p. 704.

417
Eissa and Hoynes, p. 690.

418
Center on Budget and Policy Priorities, Policy Basics: State Earned Income Tax Credits, January 2,
2014, p. 2.
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Income Tax
Credits

149. Low-income credit

District of Columbia Code: D.C. Official Code 47-1806.04(e)
Sunset Date: None
Year Enacted: 1987
Total
Total $1,789 $1,789 $1,789 $1,789

DESCRIPTION: A taxpayer qualifies for a low-income credit if he or she meets the following
requirements: (1) the taxpayer files a federal tax return and his or her federal tax before credits
and payments is zero, (2) the taxpayers federal adjusted gross income is less than the sum of his
or her federal personal exemptions and federal standard deduction, and (3) the taxpayers amount
of taxable income on the form D-40 is more than zero.

For tax year 2013, the credit ranged from $155 to $1,623, depending on the taxpayers filing
status and number of personal exemptions. The credit is non-refundable, which means that the
credit reduces the amount of D.C. tax that is owed, but does not result in a tax refund if the credit
exceeds the amount of income tax liability. Taxpayers cannot claim both the D.C. earned income
tax credit and the low-income credit (see tax expenditure # 148 for a description of the earned
income tax credit).

Maryland provides a non-refundable poverty-level credit to taxpayers with earned income and
Maryland adjusted gross income below the federal poverty standards. The credit equals the lesser
of the state income tax paid or 5 percent of the taxpayers earned income. Similarly, Virginia
offers a non-refundable credit for low-income individuals for taxpayers with Virginia adjusted
gross income that falls below the federal poverty level. The credit cannot exceed $300 for each
person claimed as a personal exemption on the Virginia tax return, and taxpayers who claim
certain other exemptions or deductions, such as the additional personal exemption for the blind or
elderly, are not eligible for the low-income credit.

former Mayor Anthony Williams, recommended repealing the low-income credit because it
would not be necessary if the Commissions proposal to increase the standard deduction and
personal exemption were adopted.
419

PURPOSE: The purpose of the low-income credit is to eliminate income tax liability for poor
households. This goal is achieved by making the Districts income tax threshold equal to the
federal income tax threshold. The tax threshold is defined as the point at which a taxpayer
begins to owe income tax after allowance of the standard deduction and all personal exemptions
to which the taxpayer is entitled, but before application of any itemized deductions or credits.
420

419

420
See D.C. Official Code 47-1806.4(e)(1).
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Page 234

IMPACT: D.C. taxpayers who do not have any federal tax liability benefit from this credit.
During tax year 2011, 9,072 tax filers claimed the credit. Tax filers with income between $5,000
and $15,000 claimed half of the total credits, as shown in the table below.

The credit is particularly likely to benefit low-income individuals and families who cannot
qualify for the EITC because they have little or no earnings (such as retirees). In addition, the
low-income credit may particularly benefit low-income childless adults, who receive much
smaller EITC benefits than families with children.

($ in 000s)
Share
$1 to $5,000 960 11% $79 4%
$5,001 to $10,000 4,535 50% $539 30%
$10,001 to $15,000 1,589 18% $364 20%
$15,001 to $20,000 1,069 12% $391 22%
Greater than $20,000 853 9% $402 22%
Total 9,072 100% $1,789 100%
Low Income Credit - 2011
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Income Tax
Credits

150. Brownfield revitalization and cleanup

Sunset Date: None
Year Enacted: 2001
Total $0 $0 $0 $0

DESCRIPTION: The Mayor is authorized to submit proposed rules to the Council to establish
business franchise tax credits for businesses that clean up and redevelop brownfields, which are
defined as abandoned, idled property or industrial property where expansion or redevelopment is
complicated by actual or perceived environmental contamination.
421
The total credits awarded
to a business would be capped at 100 percent of the costs of cleaning up and 25 percent of the
costs of developing the brownfield.

A review did not identify similar business tax incentives offered by Maryland or Virginia, but

PURPOSE: The intent of this tax expenditure is to provide incentives for businesses to clean up
brownfields voluntarily, which would in turn reduce public health risks and promote economic
development by encouraging the reuse of contaminated properties.

IMPACT: Businesses that own contaminated property are the intended beneficiaries of this
provision, which is also designed to have spillover benefits to society by reducing environmental
risks and contaminants while promoting the redevelopment of brownfields. Nevertheless, the
credits have not been offered because implementing regulations have not been proposed.
422

421

422
If the Mayor proposed regulations, the Council would have 45 days to review the rules (excluding
Saturdays, Sundays, legal holidays, and periods of Council recess), and if the Council did not act within
this period, the rules would be deemed approved.
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Income Tax
Credits

151. Child and dependent care

District of Columbia Code: D.C. Official Code 47-1806.04(c)
Sunset Date: None
Year Enacted: 1977
Cl Total
Total $3,575 $3,575 $3,575 $3,575

DESCRIPTION: An individual who receives a federal child and dependent care tax credit, as
authorized by section 21 of the U.S. Internal Revenue Code (26 U.S.C. 21), is eligible for a
District of Columbia income tax credit equal to 32 percent of the federal credit. The credit is not
refundable (it cannot exceed the amount of the individuals tax liability).

The U.S. Internal Revenue Code limits the credit to care provided for a dependent child under the
age of 13, or a spouse or certain other dependents who are incapable of self-care. The care must
have been provided in order that the taxpayer, and his or her spouse if the taxpayer is married, can
work or look for work. The individual receiving the care must have lived with the taxpayer for at
least half of the year. The value of the federal credit ranges from 20 percent to 35 percent
(declining as income rises) of dependent care expenses of up to $3,000 for one qualifying
individual and $6,000 for two or more qualifying individuals.

The expenses qualifying for the credit must be reduced by the amount of any employer-provided
dependent care benefits that the taxpayer excluded from his or her gross income.

Maryland offers a child and dependent care tax credit similar to the Districts: single filers with
income up to $20,500 and joint filers with income up to $41,000 receive credits equal to 32.5
percent of the federal credit which are phased out near the top of the eligibility scale. The
Maryland credit is gradually phased out over income ranges of $20,501 to $25,000 (single filers)
and $41,001 to $50,000 (joint filers). Maryland also allows single filers to deduct up to $3,000
and joint filers to deduct up to $6,000 in actual child and dependent care expenses.
423
Virginia
does not provide a child and dependent care credit, but allows taxpayers who qualify for the
federal credit to deduct up to $3,000 in care expenses for one dependent and up to $6,000 for two
or more dependents.

PURPOSE: The purpose of the credit is to assist families in paying for child and dependent care
so that a parent or caretaker may work or look for work.

IMPACT: Individuals and families eligible for the federal child and dependent care tax credit
benefit from the D.C. credit. During tax year 2011, 16,595 tax filers claimed the credit.

423
The Maryland credit does not affect a taxpayers eligibility for or amount of the state tax subtraction for
child-care costs.
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Page 237

Urban Institute researchers have noted that, Because the credit is nonrefundable, under current
law the high credit rates remain elusive. Those for whom the highest credit rates apply rarely
owe taxes, and as a result they rarely receive any benefit from this provision.
424
The same
pattern would apply to the Districts credit because it follows the federal rules.

($ in 000s)
Share
$1 to $5,000 127 1% $83 0.7%
$5,001 to $10,000 324 2% $236 2%
$10,001 to $15,000 559 3% $465 4%
$15,001 to $20,000 1,013 6% $826 7%
Greater than $20,000 14,535 88% $9,537 85%
Total 16,595 100% $11,173 100%
Child and Dependent Care Credit - 2011

424
Elaine Maag, Stephanie Rennane, and C. Eugene Steuerle, A Reference Manual for Child Tax
Benefits, Urban-Brookings Tax Policy Center, Discussion Paper No. 32, April 2011, p. 13.

________________________________________________________________________________________________

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REAL PROPERTY TAX
________________________________________________________________________________________________

Page 239
Real Property Tax
Abatements

152. New or improved buildings used by high-technology companies

Sunset Date: None
Year Enacted: 2001
Cl Total
Revenue Loss $35 $36 $37 $38

DESCRIPTION: Two types of non-residential or mixed-use buildings are eligible for a freeze on
property taxes for a five-year period, if more than 50 percent of the tenants are qualified high-
technology companies, or at least 50 percent of the aggregate square footage is leased to a
qualified high-technology company using the premises as an office or retail space.

First, new buildings which received their initial certificate of occupancy after December 31, 2000,
are eligible for the property tax freeze. In addition, existing buildings that were improved in
order to adapt or convert the property for use by a qualified high-technology company are also
eligible for the tax abatement.

and hardware; and advanced materials and processing technologies. The property tax abatements
are part of a package of incentives for high-technology firms authorized by D.C. Law 13-256, the
425

During tax year 2013, one property in the District of Columbia received the tax abatement for
leasing space to a QHTC. The revenue loss estimated for FY 2014 to 2017 is based on the
assumption that this property continues to receive the abatement.

Prince Georges County offers a real property tax credit for businesses that are involved primarily
in high-technology manufacturing, fabrication, assembling, or research and development, and
have (1) made at least a $500,000 investment in 5,000 square feet or more of real property that is
newly constructed or substantially renovated, and (2) create at least 10 new full-time positions
over a period of three years. The credit offsets the property tax arising from any increase in the
firms real property assessment in the first year and is then phased out over the next four years.

PURPOSE: The purpose of the abatement is to ensure that high-technology companies have
adequate space and to protect property owners against sharp increases in their tax liability that
may accompany the development or conversion of space for use by high-technology companies.
More generally, the tax abatement is intended to encourage the growth of high-technology

425
employment credits, sales tax exemptions, and personal property tax exemptions, are discussed elsewhere
in this section.

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Page 240
employment base.

IMPACT: High-technology companies in the District of Columbia, as well as the property
owners who lease space to high-technology companies, are the intended beneficiaries of this
provision. The abatement violates the principle of horizontal equity because property owners
renting to tenants that are not qualified high-technology companies are not eligible for similar tax
relief.
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Real Property Tax
Abatements

153. Non-profit organizations locating in designated neighborhoods

Sunset Date: None
Year Enacted: 2010
Cl Total
Revenue Loss $153 $153 $153 $153

DESCRIPTION: Non-profit organizations,
426
as well as property owners who lease office space
to non-profits, can qualify for real property tax abatements for a period of 10 years if they are
located in an eligible non-profit zone. The authorizing statute defines five non-profit zones and
allows the Mayor to designate additional zones, which must be approved by act of the Council.

Eligible non-profits or property owners can receive a real property tax abatement of $8 per square
foot for 10 consecutive years if they: (1) purchase or lease 5,000 square feet of office space, (2)
occupy at least 75 percent of the space, (3) purchase or lease the space at the market rate, and net
of any real estate taxes, (4) do not receive any other real property tax abatement or tax-increment
financing for the office space, and (5) occupy the new space by September 30, 2013, if located in
the Capitol Riverfront, Mount Vernon Triangle, or NOMA zones, or by September 30, 2016, if
located in the Anacostia zone, the Minnesota-Benning zone, or a zone designated by the Mayor.

Eligible non-profits or property owners cannot claim the abatement for more than 100,000 square
feet of office space, and the annual abatement cannot exceed their real property tax liability. The
total annual abatement is capped at $500,000, and the total abatement for each zone over 10 years
is capped as follows: $600,000 for the Anacostia zone, $2.6 million for the Capitol Riverfront
zone, $800,000 in zones designated by the Mayor; $600,000 in the Minnesota-Benning zone, $1.2
million in the Mount Vernon Triangle zone, and $2.6 million in the NOMA zone. Non-profits
must apply to the Mayor and receive a certification of eligibility in order to claim an abatement.

PURPOSE: The purpose of the abatement is to provide an incentive for (non-profits) to locate
their offices in emerging commercial neighborhoods of the District of Columbia.
427

IMPACT: Eligible non-profits and property owners who lease space to the non-profits benefit
from the abatements. Two non-profits, the American Iron and Steel Institute at 25 Massachusetts
Avenue, N.W., and Case Western Reserve, at 820 First Street, N.E., have been approved for the
abatements,
428
but there are no plans to approve additional abatements at this time.

426
For purposes of this program, eligible non-profit organizations are those that are exempt from federal
income tax under sections 501(c)(3), (4), and (6) of the U.S. Internal Revenue Code.

427
See Title 10-B, Section 6300.1 of the D.C. Municipal Regulations.

428
lthough the Office of Revenue Analysis normally does not provide tax information about specific
individuals or organizations, D.C. Official Code 47-1001 allows disclosure of tax-exempt properties.

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Page 242
Real Property Tax
Abatements

154. Improvements to low-income housing

Sunset Date: None
Year Enacted: 2002
Revenue Loss $0 $0 $0 $0

DESCRIPTION: If the owner of an eligible housing accommodation makes improvements of at
least $10,000 per housing unit in a 24-month period, the owner is eligible for a tax abatement
equal to the increase in real property tax liability for each of the subsequent five years, relative to
a base year before the improvements were completed.

To qualify, the owner must offer at least 25 percent of the units at rents that are affordable to
households with income below 50 percent of the area median. In addition, the owner must
maintain the property as low-income housing throughout the five-year period, and is not eligible
for the abatement if he or she has recovered the costs of renovation through another program.

The total abatements provided through this tax provision are capped at $1 million annually. To
receive the benefit, the property owner must submit an application to the Mayor at least 30 days
before the physical improvements begin and receive certification from the Mayor after the
improvements are completed. The Mayor must also determine that the improvements are
unlikely to be made without the tax abatement. In Mayors Order 2009-202, dated November 25,
2009, Mayor Fenty designated the Department of Housing and Community Development
(DHCD) as the agency responsible for administering this tax abatement program.
429

PURPOSE: The purpose of the abatements is to preserve and upgrade the supply of affordable
housing by encouraging owners to rehabilitate their housing units and making the abatements
contingent on the affordability of the housing to low-income individuals and families.

IMPACT: The owners of affordable-housing accommodations who improve their housing are the
intended beneficiaries of this provision, along with the low-income residents who live in the
housing units. Nevertheless, DHCD has not received any applications for the abatement.

429
Mayors Order 2009-202, entitled Delegation of Authority Tax Abatements under Section 291 of the
Housing Act of 2002, was published in the D.C. Register, Vol. 56, No. 49, p. 9222, December 4, 2009.
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Real Property Tax
Abatements

155. New residential developments

Sunset Date: None
Year Enacted: 2002
Revenue Loss $3,771 $2,105 $1,540 $1,346

DESCRIPTION: The Mayor is authorized to grant up to $8 million annually in real property tax
abatements for new residential developments. The tax abatement for any eligible property
expires at the end of the 10
th
tax year after the tax year in which a certificate of occupancy is
issued for the property. An eligible property must be improved by new structures or undergo
rehabilitation, and have 10 or more units devoted to residential use.

The $8 million annual limit is divided among projects in three areas: (1) $2.5 million in tax
abatements for new housing projects and new mixed-income housing projects downtown, (2) $2
million in tax abatements for new housing projects and new mixed-income housing projects in
Housing Priority Area A (Mount Vernon Square North), and (3) $3.5 million in tax abatements
for new, mixed-income housing projects in other parts of the District of Columbia, which
includes a set-aside of up to $500,000 for real property located in square 2910.
430

Recipients of the tax abatements include the Mass Court Apartments at 300 Massachusetts
Avenue, N.W., the Meridian at Gallery Place apartments at 450 Massachusetts Avenue, N.W.,
the Quincy Court condominium at 1117 10
th
Street, N.W., and The Residences at Georgia
Avenue at 4100 Georgia Avenue, N.W.

The amount of tax relief varies according to the location of the property and other factors, such as
the type of construction and the percentage of affordable housing units. The rules governing the
program are set forth in Title 10-B, Chapter 59 of the D.C. Municipal Regulations. The Office of
the Deputy Mayor for Planning and Economic Development administers the program.

A property that receives a tax abatement for vacant rental housing (see tax expenditure #159) or
receives tax-increment financing is not eligible for the new residential development abatements.

PURPOSE: The regulations state that the programs purpose is to provide tax abatements as
incentives for the production of new housing downtown and for the production of affordable,
mixed-income housing in high-cost areas of the District of Columbia.
431

IMPACT: The tax abatements are intended to deliver broad-based benefits by promoting the
growth of mixed-income communities with commercial and residential uses, thereby

430
Square 2910 is bounded by Kansas Avenue, Upshur Street, Georgia Avenue, and Taylor Street in
Northwest D.C.

431
See Title 10-B, Section 5900 of the D.C. Municipal Regulations.

________________________________________________________________________________________________

Page 244
strengthening the Districts economic and tax base.
432
In particular, the downtown and Mount
Vernon Square North areas are targeted beneficiaries of the program. During FY 2014, 16
properties will receive abatements through this program.

The revenue loss declines during the FY 2014-2017 period because some properties are reaching
the end of the 10-year eligibility period. The abatements violate the principle of horizontal equity
because similar developments in other parts of the city do not qualify for equivalent tax relief.

432
This summary draws on the Council of the District of Columbia, Committee on Finance and Revenue,
Committee Report on Bill 14-183, the HomeStart Financial Incentives Act of 2001, dated November 13,
2001.
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Page 245
Real Property Tax
Abatements

156. NoMA residential developments

Sunset Date: None
Year Enacted: 2009
Revenue Loss $1,002 $4,212 $4,212 $4,212

DESCRIPTION: The Mayor is authorized to grant up to $5 million annually and $50 million in
total real property tax abatements for new residential developments in the North of Massachusetts
Avenue (NoMA) neighborhood of Wards 5 and 6. The tax abatement for any eligible property
expires at the end of the 10
th
tax year after the tax year in which a certificate of occupancy is
issued for the property. An eligible property must be improved by new structures or undergo
rehabilitation, and have 10 or more units devoted to residential use.

The tax abatement is set at $1.50 per residential floor-area ratio square foot, multiplied by the
total square footage as certified by the project architect and the Mayor. The rules governing the
program are set forth in Title 10-B, Chapter 62 of the D.C. Municipal Regulations. The Deputy
Mayor for Planning and Economic Development administers the program.

A property that claims a tax abatement for vacant rental housing (see tax expenditure #159) or
receives tax-increment financing is not eligible for the NoMA abatements.

PURPOSE: The purpose of the abatements is to encourage new multi-family residential
development in the NoMA neighborhood. Noting that residential development had slowed
considerably due to a weakening economy and credit crunch, the Councils Committee on
Finance and Revenue stated in its report on the authorizing legislation that, The tax abatement
bill would give an incentive to new builders to break ground and create new residential
development in the NoMA area. The tax incentives contained in the bill are modeled after the
successful Housing Act of 2002.
433
(see tax expenditure #155, New residential developments).

IMPACT: Housing developers and residents of the new housing developments stand to benefit
from the tax abatements, which are also intended to have broader benefits by strengthening the
Districts economic and tax base. The abatements violate the principle of horizontal equity
because similar developments in other parts of the city do not qualify for equivalent tax relief.

Two developments (250 K Street, N.E., and 130 M Street, N.E.) have already begun receiving an
abatement, and six more buildings that have not yet completed construction have received letters
from the Deputy Mayor for Planning and Economic Development that reserve abatement dollars
for them. The revenue loss from the tax abatements is projected to increase in FY 2015 once
these additional projects are completed.

433
NoMA Residential Development Tax Abatement Act of 2009, March 16, 2009, p. 2.
________________________________________________________________________________________________

Page 246
Real Property Tax
Abatements

157. Preservation of section 8 housing

Sunset Date: None
Year Enacted: 2002

DESCRIPTION: If the owner of a housing accommodation who receives subsidies through a
project-based housing assistance program (Section 8 program) of the U.S. Department of
Housing and Urban Development (HUD) renews or extends the HUD contract with substantially
the same conditions for at least five years, the owner is eligible for a tax abatement. To qualify,
the housing must be located in an area where the average rent for one-bedroom and two-bedroom
apartments exceeds the fair-market rent (as defined by HUD) by 25 percent or more.

If the contract is renewed for five years, the owner qualifies for a tax abatement for each of the
five years equal to 75 percent of any increment to his or her real property tax liability compared
to a base year immediately prior to the first year of the abatement. If the contract is renewed for
10 years, the owner qualifies for a tax abatement for each year equal to 100 percent of the
increment to his or her real property tax liability compared to the base year.

The Department of Housing and Community Development administers this tax abatement.
434

PURPOSE: The purpose of the abatement is to preserve affordable housing by encouraging
landlords to continue participating in federal housing programs for low-income households. The
abatements are limited to areas where the average rents exceed the fair-market rent by 25 percent
in order to target the benefits where they are most needed.
435

IMPACT: The owners of housing accommodations in qualified areas who renew their contracts
with HUD to provide section 8 housing are the intended beneficiaries of this provision, along
with residents of federally-subsidized housing located in the qualified areas. However, there are
presently no participants in this abatement program. Only one property owner has claimed an
abatement for preserving section 8 housing, but that abatement has expired.

434
See Mayors Order 2009-202, entitled Delegation of Authority Tax Abatements under Section 291 of
the Housing Act of 2002, D.C. Register, Vol. 56, No. 49, p. 9222, December 4, 2009.

435
This summary draws on the Council of the District of Columbia, Committee on Finance and Revenue,
Committee Report on Bill 14-183, the HomeStart Financial Incentives Act of 2001, dated November 13,
2001. The tax abatements for preservation of section 8 housing originated in Bill 14-183, which became
Law 14-114, the Housing Act of 2002, effective April 19, 2002.
________________________________________________________________________________________________

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Real Property Tax
Abatements

158. Single-room-occupancy housing

Sunset Date: None
Year Enacted: 1994

DESCRIPTION: The Mayor is authorized to provide tax abatements, as well as deferral or
forgiveness of water and sewer fees and other indebtedness to the District government, to
encourage the development of single-room-occupancy housing for low- and moderate-income
tenants. These incentives would be granted following negotiations and the signing of a written
agreement between the Mayor and housing providers who are developing or operating single-
room-occupancy housing accommodations.

The written agreement may establish a formula for abating property tax liability for the relevant
property or properties. The abatement applies for a period of no longer than 10 years, beginning
during the first year that the newly constructed or rehabilitated single-room-occupancy housing
becomes available for occupancy.

To qualify for the incentives, a housing provider must demonstrate to the satisfaction of the
Mayor that the single-room-occupancy housing (1) is affordable to low- and moderate-income
tenants and that the rent is reduced by the benefits received, (2) complies with the Districts
zoning regulations, (3) includes at least 95 square feet of space and a clothing storage unit, (4)
provides toilet and shower or bathing facilities on each floor, (5) includes common day room,
kitchen, and laundry facilities, (6) provides a 24-hour manual or electronic security system, and
(7) is supervised by a manager who resides on the premises.

PURPOSE: The purpose of the incentives is to encourage the development of single-room-
occupancy housing for low- and moderate-income tenants.

IMPACT: Organizations that develop or operate single-room-occupancy housing for low- and
moderate-income tenants are the intended beneficiaries of this provision, along with the low- and
moderate-income tenants who need affordable housing. Nevertheless, there is no evidence that
the incentives have been used.
________________________________________________________________________________________________

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Real Property Tax
Abatements

159. Vacant rental housing

Sunset Date: None
Year Enacted: 1985

DESCRIPTION: An owner of newly constructed rental housing accommodations is eligible for
tax abatements equal to 80 percent of tax liability during the first year the housing becomes
available for rental. In each succeeding year, the tax abatement would be reduced by 16
percentage points until the property is fully taxable.

When vacant rental accommodations that have been rehabilitated become available for rental, the
owner of the property also becomes eligible for an 80 percent reduction of the increased tax
liability that results from the rehabilitation. In each succeeding year, the tax abatement would be
reduced by 16 percentage points until the full value of the property is taxable. In addition, the
Mayor may defer or forgive any indebtedness owed to the District, or forgive any outstanding tax
liens when a vacant rental accommodation is being rehabilitated in accordance with this program.

A project eligible for a tax abatement or forgiveness of any indebtedness or tax lien through this
program must be certified by the Mayor as being in the best interest of the District and
consistent with the Districts rental property needs in terms of its location, type, and variety of
sizes or rental units. A property that receives tax incentives for new residential development in
targeted neighborhoods (see tax expenditures #155 and #156) is not eligible for this program.

PURPOSE: The purpose of the abatement is to expand the supply of safe and affordable rental
housing for low- to moderate-income residents of the District of Columbia.

IMPACT: Renters as well as the owners of newly constructed or rehabilitated rental housing are
the intended beneficiaries of this tax incentive. Nevertheless, there is no evidence that any
abatements have been awarded through this program in recent years.

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Real Property Tax
Exemptions

160. Development of a qualified supermarket, restaurant or retail
store

District of Columbia Code: D.C. Official Code 47-1002(23)
Sunset Date: None
Year Enacted: 1988
Cl Total
Revenue Loss $2,383 $2,948 $2,958 $3,684

DESCRIPTION: A qualified supermarket, restaurant or retail store is eligible for a real property
tax exemption for 10 consecutive years beginning with the tax year in which a certificate of
occupancy was issued for the development. Qualified supermarkets, restaurants, and retail stores
must be located in census tracts where more than half of the households have incomes below 60
percent of the area median, as determined by the U.S. Department of Housing and Urban
Development. The property must continue to be used for the original purpose in order to
maintain the exemption.

If the real property is not owned by the supermarket, restaurant, or retail store, the owner of the
property can qualify for the real property tax exemption (also valid for 10 years) if the owner
leases the land or structure to the supermarket at a fair-market rent that is reduced by the amount
of the tax exemption. The authorizing statute also provides that a qualifying supermarket,
restaurant, or retail store that leases real property which is part of a larger development can
receive a rebate from the D.C. government for its pro-rata share of the property tax paid, if the
owner of the property has already paid the tax.

However, the authorizing statute provides that any new exemptions for a qualified restaurant, or
retail store beginning on or after October 1, 2010, shall not be granted until the fiscal effect of
any such new exemptions is included in an approved budget and financial plan.
436

PURPOSE: The purpose of this exemption is to encourage the construction and operation of
supermarkets, restaurants and retail stores in lower-income areas of the city.

IMPACT: Individuals and organizations that are constructing and operating supermarkets,
restaurants, and retail stores in the target areas benefit from this provision, as do residents of these
areas. Presently, 13 supermarkets and one restaurant claim the exemption. The exemption
violates the principle of horizontal equity because other businesses locating in the target areas do
not receive a similar exemption.

The estimates of forgone revenue shown above are based on past experience suggesting that an
additional three supermarkets will qualify each year.

436
See D.C. Official Code 47-3802(b)(1), as amended by D.C. Law 20-61, the Fiscal Year 2014 Budget
Support Act of 2013, effective December 24, 2013.
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Real Property Tax
Exemptions

161. High-technology commercial real estate database and service
providers

Sunset Date: None
Year Enacted: 2010
Cl Total
Revenue Loss $700 $700 $700 $700

DESCRIPTION: Real property that is leased and occupied by a high-technology commercial real
estate database and service provider qualifies for a 10-year exemption from the real property tax,
subject to certain conditions. The real property must be located in an enterprise zone or a low- or
moderate-income area, must have been occupied by December 31, 2010, and must continue to be
occupied by the high-technology database and service provider. In addition, (1) the lease for the
real property must last at least 10 years, (2) the tenant must employ a minimum of 250 employees
in the District of Columbia, (3) the tenant must enter into an agreement with the Department of
Small and Local Business Development about small and local business participation in any
design, buildout, or improvement of the real property, and (4) the real property owner must pass
the exemption through to the high-technology database and service provider.

To claim the exemption, the firm had to certify to the Department of Employment Services that it
increased the number of new employees residing in the District of Columbia by at least 100,
relative to a baseline employment level as of January 5, 2010. The firm must maintain
employment at greater than the baseline level throughout the term of the abatement. The value of
the exemption is capped at $700,000 annually and at $6,185,000 over 10 years.

PURPOSE: According to the Committee on Finance and Revenue report on the authorizing
legislation, The purpose of this legislation is to encourage business relocation into the District.
The legislation will enable the attraction of a niche technology industry to the District.
437
The
Office of the Deputy Mayor for Planning and Economic Development also expressed the view
that the provision would increase employment, business activity, and tax revenue.
438

IMPACT: The CoStar Group, which leases space at 1331 L Street, N.W., benefited from a
$700,000 exemption in tax years 2011, 2012, and 2013. Because the authorizing statute provides
that the property must have been occupied by December 31, 2010, there will be no additional
beneficiaries.

437
High Technology Commercial Real Estate Database and Service Providers Tax Abatement Act of 2008,
November 24, 2009, p. 1.

438
High Technology Commercial Real Estate Database and Service Providers Tax Abatement Act of 2008,
November 24, 2009, p. 3.
________________________________________________________________________________________________

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Real Property Tax
Exemptions

162. Educational institutions

Sunset Date: None
Year Enacted: 1942
l Total
Revenue Loss $104,195 $104,455 $104,716 $104,978

DESCRIPTION: Buildings belonging to and operated by schools, colleges, or universities
which are not organized or operated for private gain, and which embrace the generally
recognized relationship of teacher and student, are exempt from real property taxation.

Exempting educational institutions from the real property tax is standard practice throughout the
United States. Both Virginia and Maryland exempt educational institutions from real property
taxation.

PURPOSE: The exemption supports a general policy of providing property tax exemptions to
non-profit organizations that provide religious, charitable, social, scientific, literary, educational,
or cultural benefits to the general public.

IMPACT: Educational institutions benefit directly from the exemption, which is also expected to
provide broader societal benefits such as a better-informed citizenry and a more productive
workforce. During tax year 2013, 462 properties received the educational institutions exemption.

Educational institutions account for 6.7 percent of the total assessed value of tax-exempt property
in the District of Columbia.
439
The tax exemptions given to certain properties shift the burden of
paying for public services to taxable properties and may result in those properties paying a higher
property tax rate.

439
In tax year 2013, tax-exempt property of educational institutions was valued at almost $5.8 billion. The
total value of tax-exempt property in the District of Columbia was valued at $85.8 billion.
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Real Property Tax
Exemptions

163. Libraries

Sunset Date: None
Year Enacted: 1942
l Total
Revenue Loss $426 $427 $428 $429

DESCRIPTION: Library buildings that belong to and are operated by organizations that are not
organized or operated for private gain, and are open to the public generally, are exempt from real
property taxation.

It is not clear whether private, non-profit libraries in other states are exempt from real property
taxation. Libraries may qualify for real property exemptions granted to educational institutions or
to art and cultural organizations, depending on the specific definitions of those categories in each
state and how the statutory language has been interpreted.


IMPACT: Libraries benefit from the exemption, but there may be a wider social benefit because
the libraries are open to the public and thereby provide opportunities for learning and enrichment
to the general populace. Presently, the Folger Shakespeare Library is the only library that
qualifies for this exemption.

________________________________________________________________________________________________

Page 253
Real Property Tax
Exemptions

164. Embassies, chanceries, and associated properties of foreign
governments

Sunset Date: None
Year Enacted: 1942
Total
Revenue Loss $43,825 $43,935 $44,045 $44,155

DESCRIPTION: Property belonging to foreign governments and used for diplomatic purposes is
exempt from real property taxation in the District of Columbia. To claim the exemption, a
foreign government must send a diplomatic note to the U.S. Department of States Office of
Foreign Missions, which submits the request for property tax exemption to the D.C. government
along with a Foreign Government Information Request Form that is completed by the foreign
government.
440

Exempting embassies and chanceries from real property taxation is standard practice, but such
property is concentrated in D.C. and New York City. Neighboring jurisdictions such as
Montgomery County, Arlington County, and Fairfax County exempt the property of foreign
governments from the real property tax.

PURPOSE: The purpose of the exemption is to uphold a principle of international law that
foreign governments are entitled to a tax exemption for real property owned by the foreign
government and used by its diplomatic mission. Any portion of the property that is not used for
diplomatic or consular purposes is not exempt from the Districts real property tax.

IMPACT: Foreign governments that own embassies, chanceries, and associated properties in the
District of Columbia benefit from this exemption. During tax year 2013, 610 properties received
the exemption for embassies, chanceries, and associated properties of foreign governments.
These properties account for 3.4 percent of the total assessed value of tax-exempt property in the
District of Columbia.
441

440
U.S. Department of State, Office of Foreign Missions, Diplomatic Note 06-01, dated April 12, 2006.

441
In tax year 2013, tax-exempt property of foreign governments was valued at $2.9 billion. The total
value of tax-exempt property in the District of Columbia was valued at $85.8 billion.
________________________________________________________________________________________________

Page 254
Real Property Tax
Exemptions

165. Federal government property

Sunset Date: None
Year Enacted: 1942
Total
Revenue Loss $839,900 $841,999 $844,904 $846,215

DESCRIPTION: Property belonging to the United States is exempt from real property taxation in
the District of Columbia, unless the taxation of same has been authorized by Congress.
442

PURPOSE: This exemption recognizes the federal governments immunity from taxation by
states or municipalities. This immunity has been established in numerous court decisions,
beginning with McCulloch v. Maryland, 17 U.S. 316 in 1819, and has been reinforced in other
cases including Clallam County v. United States, 263 U.S. 341 in 1923; Cleveland v. United
States, 323 U.S. 329, 333 in 1945; United States v. Mississippi Tax Commission, 412 U.S. 363 in
1973; and United States v. Mississippi Tax Commission, 421 U.S. 599 in 1975.

IMPACT: The United States government benefits from this exemption. During tax year 2013,
2,790 properties received the federal government exemption. These properties account for 53
percent of the total assessed value of tax-exempt property in the District of Columbia.
443

442

443
In tax year 2013, tax-exempt property of the U.S. government was valued at $45.7 billion. The total
________________________________________________________________________________________________

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Real Property Tax
Exemptions

166. Miscellaneous properties

District of Columbia Code: Title 47 of the D.C. Official Code, Chapters 10 and 46
Sunset Date: Varies
444

Year Enacted: Multiple years
Total
Revenue Loss $118,784 $119,081 $119,379 $119,677

DESCRIPTION: This tax expenditure includes (1) properties that qualify for a tax exemption
based on multiple categories, and (2) individual properties that were granted statutory exemptions
but did not fall into any of the other categories of tax-exempt property, such as non-profit
educational institutions, non-profit hospitals, and charitable organizations. Real property
exemptions for individual properties are found in Chapter 10 (Property Exempt from Taxation)
and Chapter 46 (Special Tax Incentives) of Title 47 (Taxation, Licensing, Permits,
Assessments, and Fees) of the D.C. Official Code.

An example of property that would qualify as exempt based on multiple categories is land owned
by the Washington Metropolitan Area Transit Authority (which is tax-exempt) that is the site of a
tax-exempt affordable housing development.

PURPOSE: The purpose of the exemptions is to reflect special circumstances that were
determined to justify a real property tax exemption by the D.C. Council or the U.S. Congress.

IMPACT: The property owners who benefit from these tax exemptions represent a diverse array
of organizations and commercial enterprises. During tax year 2013, 2,786 tax-exempt properties
fell into the miscellaneous category. These properties account for 9 percent of the total assessed
value of tax-exempt property in the District of Columbia.
445
The tax exemptions given to certain
properties shift the burden of paying for public services to taxable properties and may result in
those properties paying a higher property tax rate.

Examples of organizations that have been awarded individual tax exemptions include the
National Geographic Society, the Brookings Institution, the American Chemical Society, the
National Society of the Colonial Dames of America, the Young Mens Christian Association, the
National Education Association, the Woolly Mammoth Theatre Company, the Rosedale
Conservatory, the Capitol Hill Community Garden Land Trust, the Heurich House Foundation,
the Brentwood Retail Center, and the OTO Hotel at Constitution Square.

Several international organizations with tax-exempt property fall into this category, including the
World Bank, International Monetary Fund, and the Inter-American Development Bank.

444
Some of the individual properties have sunset dates for their tax exemptions, but the more common
restriction is that the exemption is valid so long as the property continues to be used for the same purpose
as when the exemption was granted.

445
In tax year 2013, tax-exempt miscellaneous properties were valued at $7.7 billion. The total value of
tax-exempt property in the District of Columbia was valued at $85.8 billion.
________________________________________________________________________________________________

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Real Property Tax
Exemptions

167. Hospital buildings

Sunset Date: None
Year Enacted: 1942
l Total
Revenue Loss $13,352 $13,386 $13,419 $13,453

DESCRIPTION: Hospital buildings that belong to and are operated by organizations which are
not organized or operated for private gain are exempt from real property taxation.
446

Exempting non-profit hospitals from the real property tax is standard practice throughout the
United States. Both Virginia and Maryland exempt non-profit hospitals from real property
taxation, but Marylands exemption is limited to 100 acres of real property.


IMPACT: Non-profit hospitals benefit from the exemption, but the general public is also
intended to benefit from this subsidy to hospital care. During tax year 2013, 11 properties
received the hospital building exemption.

Hospitals account for 0.8 percent of the total assessed value of tax-exempt property in the District
of Columbia.
447
The tax exemptions given to certain properties shift the burden of paying for
public services to taxable properties and may result in those properties paying a higher property
tax rate.

446

447
In tax year 2013, tax-exempt property of hospitals was valued at $723 million. The total value of tax-
exempt property in the District of Columbia was valued at $85.8 billion.
________________________________________________________________________________________________

Page 257
Real Property Tax
Exemptions

168. Historic property

Sunset Date: None
Year Enacted: 1974

DESCRIPTION: The D.C. Council is authorized to grant tax relief to the owners of buildings
that have been designated as historic by the Historic Preservation Review Board.
448
The tax relief
is provided through agreements between the D.C. government and the property owners lasting at
least 20 years, in order to assure the continued maintenance of the historic buildings.

The authorizing statute provides that the agreements shall, as a condition for tax relief, require
reasonable assurance that such buildings will be used and properly maintained and such other
conditions as the Council finds to be necessary to encourage the preservation of historic
buildings.
449
The D.C. government can seek recovery of back taxes, with interest, if the
conditions for the exemption are not fulfilled.

Montgomery County provides a Historic Preservation Tax Credit against the real property tax,
equal to 10 percent of the amount expended by the taxpayer for restoring or preserving a historic
property. Both Maryland and Virginia offer state historic preservation tax credits against other
taxes (personal income, corporate income, and insurance premiums taxes in both states, and the
bank franchise tax in Virginia).

PURPOSE: The purpose of this provision is to protect historic buildings and landmarks in the
District of Columbia; preserve the citys historic, aesthetic, and cultural heritage; foster civic
pride; and enhance the citys attractiveness to visitors, thereby promoting economic development.

IMPACT: The owners of historic buildings receive the direct benefits of the tax relief, but there
may be a broader benefit to D.C. residents from the preservation of the citys cultural and social
history, as well as neighborhood beautification and improvement.

In recent years, two properties have received partial tax exemptions due to their historical status,
but one of the properties (the Washington Club at 15 Dupont Circle, N.W.) was recently sold and
is to be renovated as a luxury apartment building. Therefore, the revenue loss estimate is based
on the assumption that only the other property (the Potomac Boat Club at 3530 K Street, N.W.)
will receive the exemption during the FY 2014-2017 period.
450

448
Although the statute cites the Joint Committee on Landmarks of the National Capital as the designating
authority, the Joint Committee was replaced by the Historic Preservation Review Board in 1978.

449
See D.C. Official Code 47-844.

450
The Potomac Boat Clubs exemption extends through FY 2021.
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Real Property Tax
Exemptions

169. Homestead deduction

Sunset Date: None
Year Enacted: 1978
Revenue Loss $57,264 $58,982 $60,751 $62,574

DESCRIPTION: Taxpayers who live in their own home in the District of Columbia may take a
homestead deduction that reduces the taxable value of their home. The homestead deduction is
$70,200 for tax year 2014. Annual cost-of-living adjustments to the homestead deduction were
suspended for several years due to the budget crisis that resulted from the economic recession, but
the adjustments resumed on October 1, 2012.

To qualify for the homestead deduction, a taxpayer must file an application with the Office of
Tax and Revenue. Only homes with five or fewer dwelling units, including the unit occupied by
the owner, are eligible. Taxpayers may not claim the deduction for more than one home.

Although neighboring jurisdictions in Maryland and Virginia provide a variety of property tax
reductions to homeowners, they do not offer a provision similar to the Districts homestead
deduction. Maryland offers a circuit breaker program that allows credits against a
homeowners property tax bill if property taxes exceed a certain percentage of gross income.
451

The Virginia Constitution authorizes localities to grant real property tax exemptions or deferrals
to the elderly and disabled homeowners (subject to conditions established in statute by the
Virginia General Assembly, but Virginia law does not allow a homestead exemption similar to
the Districts). The Virginia Constitution also mandates that localities grant a real property tax
exemption to veteran homeowners who are permanently and totally disabled, or to the surviving
spouse of the veteran.

PURPOSE: The purpose of the homestead deduction is to encourage individuals to own and
occupy homes in the District of Columbia and to provide tax relief to resident homeowners.

IMPACT: District of Columbia residents who own their home benefit from this provision. In tax
year 2013, 94,656 owner-occupied residential properties received the homestead exemption.
Mark Haveman and Terri Sexton point out that, Exemptions and credits for specified dollar
amounts will result in a greater percentage tax reduction for owners of low-value homes, while
exemptions and credits for a percentage of value will provide a greater dollar savings to owners
of high-value homes.
452

451
This credit is somewhat similar to the Districts Schedule H program, but in Maryland the credit is
offered against the property tax bill.

452
Mark Haveman and Terri Sexton, Property Tax Assessment Limits: Lessons from Thirty Years of
Experience Policy Focus Report PF018 of the Lincoln Institute of Land Policy, 2008, p. 33.
________________________________________________________________________________________________

Page 259
Real Property Tax
Exemptions

170. Lower-income homeownership households and cooperative
housing associations

Sunset Date: None
Year Enacted: 1983
Total
Revenue Loss $9,711 $9,735 $9,760 $9,784

DESCRIPTION: Certain property transferred to a qualifying lower income homeownership
household is exempt from real property taxation. A qualifying lower-income homeownership
household must meet two requirements: (1) household income can be no greater than 120 percent
of the lower-income guidelines established for the Washington metropolitan area by the U.S.
Department of Housing and Urban Development (HUD), and (2) the household must own the
property in fee simple or receive at least a 5 percent qualified ownership interest as part of a
shared equity financing agreement. The fair market value of the property being transferred
cannot exceed 80 percent of the median sale price for homes in the District of Columbia.

As of December 11, 2012, the household income limits ranged from $56,100 for a one-person
household to $105,780 for a household with eight or more people. The current limit on the
purchase price of the home is $367,200.

In addition, if there is a shared equity financing agreement in place, the renting household must
receive a credit against rent that is equal to the value of the property tax exemption multiplied
by the percentage of the households qualified ownership interest.

The real property tax exemption is valid until the end of the fifth tax year following the year in
which the property was transferred. During the five-year period, the owner must continue to
occupy the property. If the property is owned by a cooperative housing association, it must
continue to rent at least 50 percent of the units to households that meet the income standard for a
qualifying lower income homeownership household and benefit from the credit against rent
requirement throughout the five-year period.

PURPOSE: The authorizing statute states that, The purpose of this act is to expand
homeownership opportunities for lower-income families to the maximum extent possible at the
lowest possible cost to the District of Columbia.
453

IMPACT: Households with annual income no greater than 120 percent of the lower-income
guidelines established for the Washington metropolitan area benefit from this exemption. There
may be spillover benefits for society if homeownership leads to neighborhood improvement and
stability by giving people a greater stake in their communities.

453
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Real Property Tax
Exemptions

171. Multi-family and single-family rental and cooperative housing for
low- and moderate-income persons

Sunset Date: None
Year Enacted: 1978
Revenue Loss $1,080 $1,082 $1,085 $1,088

DESCRIPTION: Multi-family and single-family rental and cooperative housing, as well as
individual condominium units, are exempt from the real property tax if they are rented to low-
and moderate-income persons and qualify for at least one of the following federal programs: (1)
the mortgage interest subsidy program for owners of rental housing projects for lower-income
families, (2) the Section 8 housing voucher program, (3) the rent supplement program for needy
tenants, (4) the mortgage insurance program for moderate-income and displaced families, and (5)
the supportive housing direct loan program for the low-income elderly.

PURPOSE: The purpose of this provision is to increase and maintain the stock of affordable
housing in the District of Columbia.

IMPACT: Owners of housing that is rented to low- and moderate-income families benefit from
this provision, as do their tenants.
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Page 261
Real Property Tax
Exemptions

172. Nonprofit housing associations

Sunset Date: None
Year Enacted: 1983
Total
Revenue Loss $10,791 $10,818 $10,845 $10,872

DESCRIPTION: Property transferred to a qualifying non-profit housing association
454
is exempt
from the real property tax through the end of the third year in which the property was transferred,
provided that the association certifies its intent to transfer the property to (1) a qualifying lower-
income ownership household, (2) a multi-family housing property where at least 35 percent of the
households are qualifying lower income ownership households, or (3) a cooperative housing
association where at least 50 percent of the units are occupied by qualifying lower income
ownership households and receive a credit against rent.
455

A qualifying lower-income homeownership household must meet two requirements: (1)
household income can be no greater than 120 percent of the lower-income guidelines established
for the Washington metropolitan area by the U.S. Department of Housing and Urban
Development (HUD), and (2) the household must own the property in fee simple or receive at
least a 5 percent qualified ownership interest as part of a shared equity financing agreement. As
of December 1, 2012, the household income limits ranged from $56,100 for a one-person
household to $105,780 for a household with eight or more people.

Maryland exempts property owned by a non-profit housing corporation from the state real
property tax.


IMPACT: Non-profit housing associations and the lower-income residents they assist in attaining
homeownership benefit from this provision. There may be spillover benefits for society if
homeownership leads to neighborhood improvement and stability by giving people a greater stake
in their communities.

454
Specifically, an eligible non-proft housing association is one that is exempt from federal income tax
under sections 501(c)(3) or 501(c)(4) of the U.S. Internal Revenue Code.

455
The credit against rent is equal to the value of the property tax exemption multiplied by the percentage
of the households qualified ownership interest.
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Real Property Tax
Exemptions

173. Nonprofit affordable housing developers

Sunset Date: None
Year Enacted: 2012
Revenue Loss $200 $300 $400 $500

DESCRIPTION: Non-profit affordable housing developers are allowed to maintain their real
property tax exemption during the time that a project is under the restrictions of the federal low-
income housing tax credit (LIHTC) program. The reason this exemption is necessary is because
property developed through the LIHTC program is usually transferred to a private, for-profit
subsidiary of the developer. Without this exemption, the non-profit organization would have to
pay tax on property it is developing as affordable housing.

The LIHTC program was established by Congress in 1986 to provide the private market with an
incentive to invest in affordable rental housing. Federal housing tax credits are awarded by state
housing finance agencies to developers of qualified projects, who usually sell the credits to
investors to raise capital or equity for their projects.
456
The credit purchaser must be part of the
property ownership entity; this transfer is usually accomplished by creating a limited partnership
or limited liability company.

This approach reduces the debt that the developer would otherwise incur and thereby makes it
possible for an affordable housing project to offer lower rents. If the project maintains
compliance with LIHTC program requirements, investors receive a dollar-for-dollar credit against
their federal tax liability for a 10-year period. Projects eligible for housing tax credits must meet
low-income occupancy requirements.
457

PURPOSE: The purpose of the exemption is to ensure that non-profit developers of affordable
housing do not become subject to real property taxation when they participate in the LIHTC
program.

IMPACT: The exemption supports the operations of a program that the D.C. Housing Finance
Agency (which awards LIHTC credits in the District of Columbia) describes as one of the two
primary long-term financing programs used to develop affordable multi-family rental housing
projects.
458

456
The developer typically sells the credit in order to raise up-front cash for the affordable housing project.

457
Developers are required to set aside at least 20 percent of their units for households with incomes at or
below 50 percent of the area median, or at least 40 percent of their units for households at or below 60
percent of the area median (adjusted for family size).

458
See www.dchfa.org.
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Real Property Tax
Exemptions

174. Resident management corporations

Sunset Date: None
Year Enacted: 1992

DESCRIPTION: Public housing that is transferred to a qualifying resident management
corporation is exempt from the real property tax through the end of the 10
th
tax year following the
year in which the property is transferred. A resident management corporation is a non-profit
corporation in which public housing residents are the sole voting members.

PURPOSE: The purpose of the exemption is to give low-income families living in a public
housing project the opportunity to become owners of the public housing. Once residents become
owners, they are expected to have a stronger stake in the maintenance of the property and the
quality of life in the community.

IMPACT: Resident management corporations and the individuals they serve are the intended
beneficiaries of this provision. According to the D.C. Housing Authority, the Kenilworth-
Parkside project is the only property that has been transferred to a resident management
corporation.

Because the Kenilworth-Parkside Resident Management Corporation assumed control in 1992,
that property is now taxable. There are presently no beneficiaries and no exemptions are
projected for the FY 2014 through FY 2017 period.

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Real Property Tax
Exemptions

175. Correctional Treatment Facility

Sunset Date: None
Year Enacted: 1997
l Total
Revenue Loss $3,422 $3,487 $3,602 $3,721

DESCRIPTION: The Correctional Treatment Facility (CTF), located on Lot 800 of Square 1112,
(19
th
and D Streets, S.E.) is exempt from real property taxation as long as the facility on that site
is used as a correctional facility housing inmates in the custody of the Department of Corrections
(DOC).

The CTF, which houses all of DOCs female and juvenile prisoners as well as some male
prisoners who are a medium-security risk or lower, is owned and managed by the Corrections
Corporation of America, which purchased the facility from the D.C. government in 1997 under a
sale/leaseback arrangement that lasts for 20 years.

PURPOSE: The purpose of this provision is to maintain the tax-exempt status of the CTF
following the change from government to private ownership.

IMPACT: The operators of the CTF benefit from this provision, which was offered as part of a
larger agreement in which the D.C. government received up-front revenue from the sale of the
CTF.

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Real Property Tax
Exemptions

176. Art galleries

Sunset Date: None
Year Enacted: 1942
l Total
Revenue Loss $2,374 $2,380 $2,386 $2,392

DESCRIPTION: Art gallery buildings belonging to and operated by organizations which are
not organized or operated for private gain are exempt from real property taxation, provided that
they are open to the public generally and do not charge admission more than two days per week.

Non-profit art and cultural organizations are exempt from real property taxation in Maryland and
not in Virginia.

non-profit organizations that provide religious, charitable, scientific, literary, educational, or
cultural benefits to the general public.

IMPACT: Art galleries benefit from the exemption, but there may be a wider social benefit
because the galleries are open to the public and provide general cultural enrichment. At the same
time, the tax exemptions given to certain properties shift the burden of paying for public services
to taxable properties and may result in those properties paying a higher property tax rate.

Galleries or museums that benefit from this exemption include Decatur House, the Hillwood
Estate, the Kreeger Museum, the Phillips Collection, and the National Museum for Women in the
Arts. Many other galleries or museums are exempt through other provisions of the property tax
code; for example, some are located on federal property and others have been exempted from real
property taxation by a special act of Congress.

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Real Property Tax
Exemptions

177. Cemeteries

Sunset Date: None
Year Enacted: 1942
l Total
Revenue Loss $5,723 $5,728 $5,734 $5,740

DESCRIPTION: Cemeteries dedicated to and used solely for burial purposes and not organized
or operated for private gain, including buildings and structures reasonably necessary and usual to
the operation of a cemetery, are exempt from real property taxation.

Real property tax exemptions for non-profit cemeteries are standard nationwide. Both Maryland
and Virginia exempt non-profit cemeteries from real property taxation.

social benefits to the general public.

IMPACT: Non-profit cemeteries benefit from the exemption, but there may be a wider social
benefit as well.

During tax year 2013, 22 cemetery properties received this exemption. Cemeteries account for
0.4 percent of the total assessed value of tax-exempt property in the District of Columbia.
459

459
In tax year 2013, tax-exempt property of educational institutions was valued at $314 million. The total
________________________________________________________________________________________________

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Real Property Tax
Exemptions

178. Charitable organizations

Sunset Date: None
Year Enacted: 1942
l Total
Revenue Loss $14,534 $14,571 $14,607 $14,644

DESCRIPTION: Buildings belonging to and operated by institutions which are not organized or
operated for private gain, and are used for purposes of public charity principally in the District
of Columbia,
460
are exempt from real property taxation.

Real property exemptions for charitable organizations represent standard practice throughout the
United States. Maryland and Virginia exempt charitable organizations from the real property tax.

cultural benefits to the general public.

IMPACT: Charitable organizations benefit directly from the exemption, which is also expected
to provide broader societal benefits by encouraging the voluntary provision of social services.
During tax year 2013, 469 properties received the charitable use exemption.

Some experts have pointed out that the exemption may be poorly targeted, because it favors
charitable non-profits that own real estate, and may encourage some non-profits to invest more in
real property than is optimal from the standpoint of maximizing social welfare (for example, the
investment in real estate could come at the expense of an organizations charitable mission itself).

Property owned by charitable organizations accounts for 1.2 percent of the total assessed value of
tax-exempt property in the District of Columbia.
461
The tax exemptions given to certain
properties shift the burden of paying for public services to taxable properties and may result in
those properties paying a higher property tax rate.

460

461
In tax year 2013, tax-exempt property of educational institutions was valued at $1.0 billion. The total
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Real Property Tax
Exemptions

179. Churches, synagogues, and mosques

Sunset Date: None
Year Enacted: 1942
l Total
Revenue Loss $60,626 $60,778 $60,930 $61,082

DESCRIPTION: Churches, including buildings and structures reasonably necessary and usual in
the performance of the activities of the church, are exempt from real property taxation. A church
building is defined as a building primarily and regularly used by its congregation for public
religious worship.
462

In addition, the following types of property belonging to religious orders or societies are exempt
from real property taxation: buildings belonging to religious corporations or societies primarily
and regularly used for religious worship, study, training, and missionary activities; pastoral
residences owned by a church and actually occupied by the churchs pastor, rector, minister, or
rabbi (with a limit of one pastoral residence for any church or congregation); and Episcopal
residences owned by a church and used exclusively as the residence of a bishop of the church.

Real property tax exemptions for churches, synagogues, mosques, and other places of religious
worship are standard nationwide. Both Maryland and Virginia exempt churches, synagogues, and
mosques from real property taxation.

PURPOSE: The exemption reflects a general policy of providing property tax exemptions to
cultural benefits to the general public. More specifically, the exemption is intended to promote
the free exercise of religion and respect the separation of church and state.

IMPACT: Churches, synagogues, mosques, and other places of worship benefit from the
exemption, but the exemption is also intended to benefit society more broadly by promoting the
free exercise of religion and the separation of church and state. During tax year 2013, there were
1,159 tax-exempt church properties. Property owned by churches, synagogues, and mosques
accounts for 4.1 percent of the total assessed value of tax-exempt property in the District of
Columbia.
463

462

463
In tax year 2013, tax-exempt property of churches, synagogues, and mosques was valued at $3.5 billion.
The total value of tax-exempt property in the District of Columbia was valued at $85.8 billion.
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Real Property Tax
Exemptions

180. Washington Metropolitan Area Transit Authority properties

Sunset Date: None
Year Enacted: 1966
l Total
Revenue Loss $9,408 $9,432 $9,456 $9,479

DESCRIPTION: The Washington Metropolitan Area Transit Authority Compact establishes the
rules that govern the operation and administration of the regional mass transit system, commonly
known as Metro. The District of Columbia, the State of Maryland, and the Commonwealth of
Virginia are signatories to the Compact. Article XVI (General Provisions), Section 78 of the
Compact, exempts the Washington Metropolitan Area Transit Authority (WMATA) and its Board
from all taxes or assessments on any property that WMATA owns or controls.

PURPOSE: As stated in the Compact, WMATAs mission is in all respects for the benefit of the
people of the signatory states and is for a public purpose.
464
WMATAs exemption from all
taxes or assessments on its property helps WMATA fulfill its mission of improving transportation
throughout the region, and extends to this regional organization the tax exemption that is
provided to federal and local government property.

IMPACT: Residents of the Washington metropolitan area benefit from this tax exemption, as do
the businesses and visitors who also rely on the Metro system, because the exemption allows
WMATA to devote more of its resources to serving the public. Nevertheless, the tax exemption
may reduce the costs of keeping land undeveloped.

During tax year 2013, there were 402 tax-exempt WMATA properties in the District of
Columbia. These properties account for 0.6 percent of the total assessed value of tax-exempt
property in the District of Columbia.
465

WMATA has engaged in joint developments on its property, which augment the local tax base.
For example, Metro sold land adjacent to the Georgia Avenue-Petworth Metrorail station that was
developed as housing and retail space.

464
See Article XVI, Section 70 of the Washington Metropolitan Area Transit Authority Compact.

465
In tax year 2013, tax-exempt property of churches, synagogues, and mosques was valued at $537
million. The total value of tax-exempt property in the District of Columbia was valued at $85.8 billion.
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Real Property Tax
Credits

181. Qualified social electronic commerce companies

District of Columbia Code: D.C. Official Code 47-1818.01 47-1818.08
Sunset Date: None
Year Enacted: 2012
l Total
Revenue Loss $0 $0 $1,510 $1,580

DESCRIPTION: A qualified social e-commerce company is eligible for a real property tax
credit, called the New Hire Wage Credit, equal to 10 percent of the salaries paid to new
employees in their first 24 months, adjusted for the percentage of D.C. residents in the new hire
pool. A qualified social e-commerce company is defined as a qualified high-technology
company (QHTC) that hired at least 850 employees to work in the District of Columbia between
December 31, 2009, and January 1, 2012, and that is engaged primarily in the business of
marketing or the promoting of retail or service businesses by delivering or providing members or
users with access to discounts or other commerce-based benefits.
466

A QHTC must (1) have two or more employees in the District, and (2) derive at least 51 percent
of gross revenues earned in the District from specified technology-related goods and services
such as Internet-related services and sales; information and communication technologies,
equipment and systems that involve advanced computer software and hardware; and advanced
materials and processing technologies.

To determine the credit, a base amount of $5,000 per new hire is multiplied by (1) 100 percent if
at least half of new hires in a calendar year are D.C. residents, (2) 75 percent if at least 40 percent
of new hires in a calendar year are D.C. residents, or (3) 50 percent if less than 40 percent of new
hires in a calendar year are D.C. residents. The New Wage Hire Credit is capped at $15 million
between FY 2016 and FY 2025.

To claim the credit, the social e-commerce company must also meet the following conditions: (1)
hire at least 50 new employees annually, (2) employ at least 1,000 persons in the District from the
start of FY 2016 through the end of FY 2025, (3) develop a joint business activity with the
Deputy Mayor for Planning and Economic Development to provide assistance to small
businesses, train software developers, and provide students with summer jobs, (4) occupy real
property of at least 200,000 square feet that has been constructed as its primary corporate
headquarters after June 1, 2012, and (5) not file for bankruptcy. If any of the first three criteria
are not met, the firm is not eligible for the tax credits during the period of non-compliance. If
either of the final two criteria is not met, the firms credit eligibility is terminated. If other
entities occupy part of the property where the social e-commerce company is located, then the tax
credit will be adjusted to reflect the proportion of space occupied by the social e-commerce
company.

A qualified social e-commerce company may not claim any of the other tax credits or abatements
for business income tax or real property tax that are claimed by QHTCs.

466
See D.C. Official Code 47-1818.01(7)(B).
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Page 271
PURPOSE: According to the D.C. Council Committee on Finance and Revenues report on the
authorizing legislation, the purpose of the credits is to encourage LivingSocial to locate its
headquarters in the District and to hire District residents.
467
LivingSocial is a privately-held,
D.C.-based company. As of June 2012, LivingSocial had 65 million subscribers and 5,000
employees worldwide, including 1,000 employees in the District.
468

The Committee on Finance and Revenue also stated that, Although LivingSocial qualifies as a
QHTC, however, it is currently unable to benefit from tax advantages such as wage tax credits
and corporate franchise tax exemptions, as it has not yet generated taxable income.
469

IMPACT: The impact of the tax credits for LivingSocial are not yet clear, because the credits will
not be offered until FY 2016. The estimated revenue loss for FY 2016 and FY 2017 is based on
an assumption that LivingSocial occupies a property of at least $200,000 square feet that would
be taxed at $7.50 per square foot, that Living Social hires at least 150 new employees in the first
two years after the bills enactment, and at least half of the new employees are D.C. residents.

467
Social E-Commerce Job Creation Tax Incentive Act of 2012, June 13, 2012, pp. 1-2.

468

469
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Page 272
Real Property Tax
Credits

182. First-time homebuyer credit for D.C. government employees

Sunset Date: None
Year Enacted: 2000
Revenue Loss $313 $318 $329 $340

DESCRIPTION: District of Columbia government employees; employees of District of
Columbia public charter schools; and individuals who have accepted an offer to be a District of
Columbia police officer, firefighter, emergency medical technician, public school teacher, or
public charter school teacher are eligible for property-tax credits if they are first-time homebuyers
in the District of Columbia.

When first-time homebuyer credits were first authorized in 2000, only police officers were
eligible, but the law was amended in 2007 to include the other groups of employees listed above.

The property-tax credit phases out over five years. In the first year, the credit equals 80 percent
of property tax liability; in the second year, 60 percent; in the third year, 40 percent; and in the
fourth and fifth years, 20 percent.

PURPOSE: The purpose of the credit is to provide a tool to recruit and retain qualified
employees (particularly teachers, police officers, firefighters, and emergency medical
technicians); to strengthen the economic and tax base; and to encourage employees to live in the
District of Columbia and become engaged in its civic and neighborhood life.

IMPACT: District government employees, as well as individuals who have accepted an offer to
serve as a District of Columbia police officer, firefighter, emergency medical technician, or
teacher benefit from this tax credit. As noted above, there may also be spillover benefits for
District of Columbia neighborhoods and the District economy. However, the credit violates the
principle of horizontal equity because only some groups of new homebuyers are eligible. In
addition, employees may prefer to receive compensation in the form of wages and salary, which
they can use to buy the goods and services that they most need.

According to the Department of Housing and Community Development, use of the credits has
been fairly steady in recent years, ranging from 70 to 86 claimants in the 2008-2012 period before
rising to 103 claimants in 2013.

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Page 273
Real Property Tax
Credits

183. Assessment increase cap

Sunset Date: None
Year Enacted: 2001
Revenue Loss $17,177 $18,310 $18,859 $19,425

DESCRIPTION: Homeowners who qualify for a homestead deduction (those who occupy a
home in the District of Columbia as their principal residence) are also eligible for an annual
assessment cap credit. This credit limits the taxable assessed value of the individuals home to a
10 percent increase from the prior tax year.

If during the prior tax year the property was sold, its value was increased due to a change in its
zoning classification, or the assessment of the property was clearly erroneous due to an error in
calculation or measurement of improvements, then the taxpayer does not qualify for the
assessment increase cap. In addition, the statute provides that the taxable assessment of a
property eligible for a homestead deduction shall not fall below 40 percent of the current tax
years assessed value.

For the state property tax, Maryland also imposes a 10 percent cap on the annual increase in the
taxable assessed value of an owner-occupied home. The 10 percent cap also applies to local
property taxes in Maryland, but local governments can adopt a cap lower than 10 percent.
Virginia law limits the property tax growth in each locality to a 1 percent annual increase,
excluding increases in property tax values that result from new construction or improvements, but
localities may exceed the 1 percent cap after holding a public hearing on the issue (there is no
state property tax in Virginia).

PURPOSE: The purpose of the cap is to protect resident homeowners from sharp growth in
property values and assessments. In the early to middle part of the past decade, the value of
residential real property soared in the District of Columbia. Assessed values often rose by more
than 20 percent annually, and sometimes more than doubled in a single year. From fiscal year
2002 to fiscal year 2007, the assessed value of residential real property in the District almost
tripled from $24.9 billion to $73.1 billion.
470
The cap was intended to protect resident
homeowners from these rapid increases in real property tax liability, and was also designed to
smooth the transition from triennial assessments to annual assessments.

IMPACT: Homeowners who have a principal residence in the District of Columbia benefit from
the assessment increase cap. In tax year 2013, 27,056 owner-occupied households enjoyed lower
taxes due to the cap. Since FY 2010, the estimated revenue loss from the cap and the number of
beneficiaries has dropped as growth in assessed value has moderated.

470
Government of the District of Columbia, Office of the Chief Financial Officer, CAFR 2008:
Comprehensive Annual Financial Report, Year Ended September 30, 2008 (January 2009), p. 160.
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Page 274
Due to the variation in rates of property value growth in different neighborhoods, the assessment
increase cap can create equity problems. Some taxpayers will pay real property tax based on the
full assessed value, while others who live in rapidly appreciating areas that benefit from the cap
will not.

In a paper prepared for the D.C. Tax Revision Commission, University of Georgia professor
David Sjoquist found that owners of more expensive houses typically have a smaller percentage
reduction in taxable value due to the assessment cap.
471
In addition, the cap creates inequities in
the taxable percentage of assessed value by neighborhood.
472

Professor Sjoquist also found that senior citizens benefit more from the assessment cap (their
taxable value is lower as a percentage of assessed value) than non-seniors, possibly because
senior citizens stay in their homes longer.
473
He also estimated that a 10 percent reduction in a
homeowners tax bill due to the D.C. assessment cap reduces the probability that the owner will
move by 2.26 percent. The reduction in mobility is attributed to the sharp rise in property taxes
that an owner might face in a new home, which is assessed at market value after being
purchased.
474

471
David Sjoquist, The Residential Property Tax Credit: An Analysis of the District of Columbias
Assessment Limitation, report prepared for the D.C. Tax Revision Commission, May 2013, pp. 28-30.

472
Sjoquist, pp. 32-37.

473
Sjoquist, p. 38.

474
Sjoquist, pp. 40-43.
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Real Property Tax
Credits

184. Senior citizens and persons with disabilities

Sunset Date: None
Year Enacted: 1986
Revenue Loss $21,520 $21,574 $21,628 $21,682

DESCRIPTION: Senior citizens (age 65 or older) and persons with disabilities qualify for a 50
percent reduction in real property tax liability on a home that they own and occupy in the District
of Columbia, provided that their household adjusted gross income is less than $125,000. The
$125,000 maximum will be adjusted for changes in the Consumer Price Index, beginning in
January 2015.

Taxpayers must file an application with the Office of Tax and Revenue in order to qualify. A
senior citizen or person with a disability must own at least 50 percent of the property or
cooperative unit, which must be the taxpayers principal place of residence.

Montgomery County offers a real property Senior Tax Credit that is equal to 25 percent of a
taxpayers combined State Homeowners Tax Credit and the county supplement to that credit
(individuals must be 70 years of age or older). As authorized by Virginia law, the city of
Alexandria as well as Arlington and Fairfax counties provide full or partial real property tax
exemptions, to low- and moderate-income senior citizens and those who are permanently and
totally disabled. The amount of the exemption depends on household gross income but the
maximum income levels are lower in Virginia,
475
and there is also an asset limit for eligible
households.

PURPOSE: The purpose of the credit is to protect senior citizens and people with disabilities,
who often live on fixed incomes, from real property tax liabilities that may be difficult or
impossible for them to pay. In 2012, when the Council raised the maximum household income
from $100,000 to $125,000, proponents pointed out that senior citizens and persons with
disabilities of modest income might otherwise be ineligible because household income (including
income of those who are not senior citizens or do not have a disability) is measured.
476

IMPACT: The beneficiaries of this provision are senior citizens and people with disabilities who
live in their own homes in the District of Columbia and have household adjusted gross income
less than $125,000. In tax year 2013, 18,119 properties qualified for the credit. The credit
violates the principle of horizontal equity because other homeowners with adjusted gross income
of less than $125,000 do not receive the same relief.

475
The maximum income levels in Alexandria City and Fairfax County are $72,000; in Arlington County,
the maximum income is $99,472.

476
Age-in-Place and Equitable Senior Citizen Real Property Act of 2012, dated March 1, 2012, p. 3.
________________________________________________________________________________________________

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Real Property Tax
Credits

185. Brownfield revitalization and cleanup

Sunset Date: None
Year Enacted: 2001

DESCRIPTION: The Mayor is authorized to submit proposed rules to the Council to establish
real property tax credits for property owners who clean up and redevelop brownfields, which
are defined as abandoned, idled property or industrial property where expansion or
redevelopment is complicated by actual or perceived environmental contamination.
477
The total
credits awarded to a property owner would be capped at 100 percent of the costs of cleanup and
25 percent of the costs for development of the contaminated property.


PURPOSE: The purpose of this tax expenditure is to provide incentives for property owners to
clean up brownfields voluntarily, which would in turn reduce public health risks and promote
economic development by encouraging the reuse of contaminated properties.

IMPACT: The owners of contaminated property are the intended beneficiaries of this provision,
which is also designed to have spillover the benefits for the public by reducing environmental
risks and contaminants while promoting the redevelopment of brownfields. Nevertheless, the
credits have not been offered because the implementing regulations have not been proposed.
478

477

478
If the Mayor proposed regulations, the Council would have 45 days to review the rules (excluding
Saturdays, Sundays, legal holidays, and periods of Council recess), and if the Council did not act within
this period, the rules would be deemed approved.
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Real Property Tax
Credits

186. Condominium and cooperative trash collection

District of Columbia Code: D.C. Official Code 47-872 (condominiums) and 47-873
(cooperatives)
Sunset Date: None
Year Enacted: 1990
Cl Toal
Revenue Loss $5,327 $5,460 $5,597 $5,737

DESCRIPTION: Owners of condominium units and cooperative dwelling units may qualify for a
trash collection credit against their real property tax liability if they pay for garbage collection
instead of receiving city garbage service. The credit, which is $105 for tax year 2014, is adjusted
annually for inflation.

In order to qualify for the credit, the property must be occupied by the owner and used for non-
transient residential purposes. In addition, the property must be located in a condominium or
cooperative housing building with more than four dwelling units.

PURPOSE: The purpose of the credit is to help defray the costs of garbage collection for real
property owners who do not receive trash collection services from the D.C. government.

IMPACT: Condominium or cooperative housing owners who pay for garbage collection benefit
from this credit. In tax year 2013, 53,340 homeowners qualified for the credit.

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Real Property Tax
Multiple

187. Economic development zone incentives

Sunset Date: None
Year Enacted: 1988


DESCRIPTION: D.C. law designates three economic development zones that are eligible for tax
and other development incentives: the Alabama Avenue zone, the D.C. Village zone, and the
Anacostia zone. The Mayor may also designate additional economic development zones, subject
to Council approval by resolution. The designation of additional zones must be based on
evidence of economic distress such as high levels of poverty, high levels of unemployment, low
income, population loss, and other criteria set forth in the authorizing statute.

The real property incentives include property tax reductions that are gradually phased out over
five years (the reduction is 80 percent the first year, and is then reduced by 16 percent each year
until reaching zero in year six); the deferral or forgiveness of any property tax owed on the
property; and the forgiveness of costs or fees associated with a nuisance property infraction. To
qualify, a property owner in an eligible zone must have constructed or substantially rehabilitated
the property after October 20, 1988, and must comply with zoning regulations.

The Mayor must submit and the Council must approve a resolution that qualifies the property for
the incentives. The resolution must identify the real property and its owner; specify each tax or
charge to be reduced, deferred, or forgiven; and state the dollar amount of each tax incentive.

Montgomery County offers enterprise zone real property tax credits to businesses that locate in
designated areas of downtown Silver Spring, Takoma Park/Long Branch, and Wheaton. The
credits start at 80 percent of the increase in real property liability, relative to a base year, and are
phased out over 10 years. Prince Georges County offers revitalization tax credits for
construction or renovation of commercial and residential structures. The credits equal 100
percent of the increased assessment value relative to a base year, and are then phased out in 20
percent annual increments. Virginia replaced its enterprise zone tax credits with a grant program.

PURPOSE: The purpose of the incentives is to encourage commercial, industrial and residential
development, and thereby to create jobs, increase homeownership, and stabilize neighborhoods
marked by high poverty and unemployment rates, low income levels, population loss, and other
indicators of economic distress.

IMPACT: Owners of newly constructed or improved real property in an economic development
zone are the intended beneficiaries of the incentives. However, only two incentive packages have
been approved since the zones were created, and neither is in effect today. There are no
proposals pending to use the economic development zone incentives.
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Page 279
Real Property Tax
Rebate

188. Public charter school tax rebate

Sunset Date: None
Year Enacted: 2005
Revenue Loss $1,296 $1,321 $1,364 $1,409

DESCRIPTION: A public charter school that leases a school facility from an entity that is
subject to the Districts real property tax is entitled to a rebate equal to the schools pro-rata share
of the lessors tax on the property, provided that the school is liable under its lease for that share
of the tax, and the lessor paid the tax.

Public charter schools must apply for the rebate by filing Form FP-305 with the Office of Tax and
Revenue.

PURPOSE: The purpose of the rebate is to put public charter schools that lease their facilities on
an equal footing with other public schools that own their facilities and are exempt from taxation
on the real property.

IMPACT: Public charter schools that lease their school buildings benefit from this provision.
During tax year 2013, 39 rebates were issued.

During the 2012-13 school year, there were 57 public charter schools with 102 campuses that
enrolled 34,673 students.
479
The D.C. Public Charter School Board has approved applications for
two new charter schools that will open in the fall of 2014.
480

479
District of Columbia Public Charter School Board, Annual Report 2013, p. 2.

480
District of Columbia Public Charter School Board, p. 13.
________________________________________________________________________________________________

Page 280
Real Property Tax
Multiple

189. Homeowners in enterprise zones

Sunset Date: None
Year Enacted: 2002

DESCRIPTION: The D.C. government provides real property tax abatements for homeowners in
an enterprise zone who substantially rehabilitate their home. Census tracts with poverty rates of
20 percent or more qualify as enterprise zones.

To qualify for the abatements, a property owner must have a household income less than 120
percent of the area median income. In order to receive a tax abatement, an owner must receive
certification from the Mayor that the property and rehabilitation meet the requirements of the law.

The tax abatement is measured as a percentage of the amount by which the homeowners tax
liability for the property increased after the substantial rehabilitation. During the year in which
the rehabilitation is completed and the following three years, the taxpayer can deduct 100 percent
of the increased tax liability. In the fourth year, the taxpayer can deduct 75 percent; in the fifth
year, 50 percent; and in the sixth year, 25 percent. In the seventh year after the rehabilitation is
completed, the property is fully taxable.

PURPOSE: The purpose of the abatement is to promote the revitalization of neighborhoods
classified as enterprise zones, to attract new residents to the District of Columbia, and to
strengthen the Districts tax base.

IMPACT: Low- to moderate-income owners of homes in enterprise zones are the intended
beneficiaries of these provisions, which are also expected to create spillover benefits for
neighborhoods with poverty rates of 20 percent or more. Presently, there are no beneficiaries of
these tax abatements and none are projected for the FY 2014 to FY 2017 period.

________________________________________________________________________________________________

Page 281
Real Property Tax
Deferrals

190. Low-income homeowners

Sunset Date: None
Year Enacted: 2005

DESCRIPTION: A taxpayer who occupies a home or condominium in the District of Columbia
as his or her principal place of residence can defer any real property tax in excess of his or her
real property tax for the prior year, if the taxpayer has a household adjusted gross income of less
than $50,000. Real property tax deferred in accordance with this provision bears interest at the
rate of 8 percent annually. The amount of real property tax deferred, including the interest on
amounts deferred in prior years, cannot exceed 25 percent of the assessed value of the property in
the current tax year.

To qualify for the deferral, the taxpayer must file an application with the Office of Tax and
Revenue. Senior citizens (those who are 65 or older) must undergo home equity conversion
mortgage counseling in order to qualify for the deferral.

Montgomery County also allows certain homeowners to defer paying the amount by which their
real property tax liability exceeds the amount due the prior year. To qualify, the household must
have had gross income of $120,000 or less the previous year, and at least one of the owners must
have lived in the home as his or her principal place of residence for the prior five years. Interest
on the deferred taxes accrues at a rate set annually by the county. In addition to the District of
Columbia, 26 states have some type of property tax deferral program in place.
481

PURPOSE: The purpose of the deferral is to protect low- and moderate-income property owners
from sharp increases in real property tax liability that may outpace the growth of their incomes.

IMPACT: Homeowners with annual household adjusted gross income less than $50,000 are the
intended beneficiaries of this provision. Nevertheless, there were no claimants during tax year
2013. The 8 percent interest rate may discourage use of the deferral, particularly during a period
of low interest rates, and it is also possible that the deferral could lead to more financial hardship
for low-income homeowners by compounding their debt. Research by the American Association
of Retired Persons (AARP) has found that participation rates in property tax deferral programs
are generally very low (less than 1 percent).
482

481
David Baer, Property Tax Relief Programs and Property Tax Burdens, American Association of
Retired Persons, August 19, 2008, p. 22, available at www.taxadmin.org.

482
Baer, pp. 22-25.
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Page 282
Real Property Tax
Deferrals

191. Low-income, senior-citizen homeowners

Sunset Date: None
Year Enacted: 2005

DESCRIPTION: A taxpayer who is 65 years of age or older, occupies a home or condominium
in the District of Columbia as his or her principal place of residence, and has a household
adjusted gross income of less than $50,000 can defer any real property tax owed in a given tax
year. The deferred taxes bear interest at the rate charged by the U.S. Internal Revenue Service on
underpayments of federal income taxes, but will not exceed 8 percent per year. The amount of
tax deferred, plus interest accrued on the taxes deferred in previous years, is limited to 25 percent
of the assessed value of the property in the current tax year.

Several additional requirements apply. The homeowner must live in a home with no more than
five dwelling units, and the senior citizen or citizens must own at least 50 percent of the house or
condominium. The homeowner must also undergo home equity conversion mortgage counseling
and file an application with the Office of Tax and Revenue to qualify for the deferral. This tax
deferral differs from the deferral available for low-income homeowners described on the previous
page (see tax expenditure #190, Low-income homeowners) by covering the entire property tax
bill, rather than just the yearly increase in property tax liability.

The City of Alexandria and Arlington County allow tax deferrals for senior citizens and persons
with disabilities. To qualify for a property tax deferral in Alexandria, the taxpayers household
gross income was limited to $72,000 in 2013. In Arlington County, senior citizens and people
with disabilities may receive a property tax deferral only if they meet income limits (which vary
based on household size) and have assets that are greater than $340,000 and less than $540,000.

Montgomery County also allows certain homeowners (whether elderly or not) to defer paying the
amount by which their real property tax liability exceeds the amount due the prior year. To
qualify, the household must have had gross income of $120,000 or less the previous year, and at
least one of the owners must have lived in the home as his or her principal place of residence for
the prior five years. Interest on the deferred taxes accrues at a rate set annually by the county. In
addition to the District of Columbia, 26 states offer some type of property tax deferral program.
483

PURPOSE: The purpose of the tax deferral is to protect low- and moderate-income senior
citizens from real property tax burdens that they cannot afford. This provision recognizes that
many senior citizens are house-rich but cash-poor, because many senior citizens live on fixed
incomes that may not keep pace with the assessed value of homes.

483
David Baer, Property Tax Relief Programs and Property Tax Burdens, American Association of
Retired Persons, August 19, 2008, p. 22, available at www.taxadmin.org.
________________________________________________________________________________________________

Page 283
IMPACT: Senior citizen homeowners with annual household adjusted gross income less than
$50,000 benefit are the intended beneficiaries of this provision. Nevertheless, there was only one
claimant in tax year 2013. Research by the American Association of Retired Persons (AARP) has
found that participation rates in property tax deferral programs are generally very low (less than 1
percent).
484

The deferral violates the principle of horizontal equity because non-elderly homeowners with the
household adjusted gross income of less than $50,000 do not receive similar tax relief (the
deferral option for low-income homeowners is more limited). The deferral might also compound
the financial difficulties of low-income senior citizens by encouraging the buildup of debt.

484
Baer, pp. 22-25.
________________________________________________________________________________________________

Page 284

DEED RECORDATION AND TRANSFER TAX
________________________________________________________________________________________________

Page 285
Deed Recordation and Transfer Tax
Exemptions

192. Educational institutions

District of Columbia Code: D.C. Official Code 42-1102(3) for the deed recordation tax
D.C. Official Code 47-902(3) for the transfer tax
Sunset Date: None
Year Enacted: 1962 (deed recordation tax) and 1980 (transfer tax)
Total
Revenue Loss $516 $518 $519 $520

DESCRIPTION: Organizations that are exempt from real property taxation in the District of
Columbia pursuant to D.C. Official Code 47-1002 are also exempt from the deed recordation
tax and transfer taxes. Educational institutions are among the groups covered under 47-1002
that qualify for this blanket exemption.

PURPOSE: The purpose of the exemption is to extend the real property tax exemption for
educational institutions to the other two taxes related to real property: the deed recordation tax
and the transfer tax. As a result, there is uniform treatment under the real property, deed
recordation, and transfer taxes for educational institutions.

IMPACT: Educational institutions benefit from this exemption, which would also be expected to
have spillover benefits for their employees and students. Moreover, there could be broader
benefits to society because education promotes a better-trained workforce and a more informed
citizenry.

________________________________________________________________________________________________

Page 286
Deed Transfer Tax
Exemptions

193. Bona-fide gifts to the District of Columbia

Sunset Date: None
Year Enacted: 2011
Total

DESCRIPTION: Real property that is transferred to the District of Columbia as a bona fide
gift, at the request of the D.C. government and without any consideration for the transfer, is
exempt from the real property transfer tax.
485

PURPOSE: The enactment of this provision was motivated by the transfer of property from
PEPCO to the D.C. government in 2008. The property was conveyed as a gift so that the D.C.
government could complete a portion of the Metropolitan Branch Pedestrian and Bicycle Trail.
486

IMPACT: The D.C. government and donors of property are the intended beneficiaries of this
exemption. The transfer from PEPCO is the only gift of property to the D.C. government known
to have occurred in recent years. A more common way of transferring private land to the District
involves the exchange of privately-owned land for a publicly-owned parcel.

485
The transfer tax on real property is based on consideration paid for the transfer, but when there is no
consideration, the tax is based on the fair market value of the property conveyed.

486
PEPCO was reimbursed by the D.C. government for the $47,850 transfer tax PEPCO paid on
transferring the property.
________________________________________________________________________________________________

Page 287
Exemptions

194. Embassies, chanceries, and associated properties of foreign
governments

Sunset Date: None
Total
Revenue Loss $1,064 $1,067 $1,069 $1,072

and transfer taxes. Foreign governments are among the groups covered under 47-1002 that
qualify for this blanket exemption, which applies to the embassies and other properties that
foreign governments use for diplomatic purposes.

PURPOSE: The purpose of the exemption is to uphold a principle of international law that
foreign governments are entitled to exemption from taxation of real property owned by the
foreign government and used by its diplomatic mission. Any portion of the property that is not
used for diplomatic or consular purposes is not exempt from the Districts deed recordation or
transfer tax. The exemption also ensures that there is uniform treatment under the real property,
deed recordation, and transfer taxes for properties purchased by foreign governments for
diplomatic uses.

IMPACT: Foreign governments that buy or sell embassies, chanceries, and associated properties
in the District of Columbia benefit from this exemption.

________________________________________________________________________________________________

Page 288
Exemptions

195. Federal government

D.C. Official Code 47-902 (2) for the transfer tax
Sunset Date: None
Total
Revenue Loss $52 $53 $53 $54

DESCRIPTION: Property acquired by the United States government is exempt from the deed
recordation and transfer taxes, unless taxation of the property has been specifically authorized by
the U.S. Congress.

PURPOSE: This exemption recognizes the fact that the federal government is immune from
taxation by the states or municipalities. This immunity has been established in numerous court
decisions, beginning with McCulloch v. Maryland, 17 U.S. 316 in 1819, and has been reinforced
in other cases including Clallam County v. United States, 263 U.S. 341 in 1923; Cleveland v.
United States, 323 U.S. 329, 333 in 1945; United States v. Mississippi Tax Commission, 412 U.S.
363 in 1973; and United States v. Mississippi Tax Commission, 421 U.S. 599 in 1975.

IMPACT: The United States government benefits from this exemption.

________________________________________________________________________________________________

Page 289
Exemptions

196. Other properties exempt from real property taxation

Sunset Date: None
otal
Revenue Loss $687 $689 $689 $690

DESCRIPTION: Properties exempted from the real property tax by D.C. Official Code 47-
1002 also receive a blanket exemption from the deed recordation and transfer taxes.
487
In
addition to some major types of tax-exempt properties that are specifically exempted by statute
from the deed recordation and transfer tax (churches, educational institutions, embassies, and
charitable organizations), there are a number of other institutions that also receive the deed
recordation and transfer tax exemptions through this blanket exemption. These institutions,
which are included in the estimate of forgone revenue shown above, include non-profit hospitals,
libraries, art galleries, and cemeteries.

PURPOSE: The purpose of this exemption is to promote equitable treatment for non-profit
institutions under the real property tax, the deed recordation tax, and the transfer tax. In addition,
the exemption recognizes and encourages the public benefits provided by many non-profit entities
such as hospitals and libraries.

IMPACT: The owners of non-profit hospitals, libraries, art galleries, cemeteries, and other
organizations that are exempt from real property taxation in the District of Columbia benefit from
this parallel exemption from the deed recordation and transfer taxes.

487
There are two narrow exceptions to this rule. D.C. law provides that the following tax-exempt
properties do not receive corresponding exemptions from the deed recordation and transfer taxes: (1)
property for which payments in lieu of taxes (PILOTs) are being made pursuant to a PILOT agreement, and
(2) land in the Capper/Carrollsburg PILOT area that is not otherwise exempt from real property taxation.
________________________________________________________________________________________________

Page 290
Deed Recordation Tax
Exemptions

197. Special act of Congress

Sunset Date: None
Year Enacted: 1962
Total
Revenue Loss $375 $376 $376 $377

DESCRIPTION: A deed to property acquired by an institution, organization, corporation, or
association entitled to an exemption from real property by a special act of Congress is exempt
from the deed recordation tax, provided that the property is acquired solely for a purpose or
purposes for which such special exemption was granted.
488

A similar exemption applicable to the transfer tax was repealed by D.C. Law 14-282, the Tax
Clarity and Recorder of Deeds Act of 2002, which took effect on April 4, 2003.
489

PURPOSE: The purpose of this exemption is to extend the deed recordation tax exemption to
properties that have been exempted from real property taxation in the District of Columbia by a
special act of Congress. Exempting the properties from both taxes promotes uniformity and
equity in property taxation.

IMPACT: Owners of property that qualifies for a real property tax exemption in the District of
Columbia by a special act of Congress benefit from this exemption. Examples include properties
owned by the Daughters of American Revolution, the National Education Association, the
American Veterans of World War II, the American Association of University Women, and
Woodrow Wilson House.

488

489
See section 11(o)(4) of this legislation.
________________________________________________________________________________________________

Page 291
Exemptions

198. Cooperative housing associations

District of Columbia Code: D.C. Official Code 42-1102(14), 47-3503(a)(2), and 47-
3503(a)(3) for deed recordation tax
D.C. Official Code 47-902(11) and 47-3503(b)(2) for
transfer tax
Sunset Date: None
Year Enacted: 1983
Total
Revenue Loss $267 $272 $278 $283

DESCRIPTION: A property acquired by a cooperative housing association is exempt from the
deed recordation and transfer taxes if at least 50 percent of the units are occupied by households
with an annual income no greater than 120 percent of the lower-income guidelines established by
the U.S. Department of Housing and Urban Development for the Washington metropolitan area.


The cooperative housing association must receive a credit against the purchase price of the
property equal to the total transfer tax that would have been due without the exemption. This
provision is necessary because the transfer tax is usually paid by the seller of the property.

490
The statute further states that, Expansion of
homeownership opportunities for lower income families is beneficial to the public peace, health,
safety and general welfare.
491

IMPACT: Cooperative housing associations with at least 50 percent of units occupied by lower-
income households benefit from this provision.

490

491
________________________________________________________________________________________________

Page 292
Deed Transfer Tax
Exemptions

199. Inclusionary zoning program

Sunset Date: None
Year Enacted: 2007

DESCRIPTION: Transfers of property to a qualifying low- or moderate-income household
pursuant to the Inclusionary Zoning (IZ) program are exempt from the transfer tax on real
property. IZ requires an affordable housing set-aside in new developments of 10 or more units, or
a substantial rehabilitation that expands an existing buildings floor-area ratio (FAR) by 50
percent or more and adds 10 or more units, in exchange for an increase in density. There are
exemptions for certain zones and historic districts.

IZ is targeted at households earning less than 50 percent of area median income (AMI), and
between 50 percent and 80 percent of AMI, depending on the zoning and the type of construction.
The amount of the affordable housing set-aside (which ranges between 8 and 10 percent of the
residential space) also varies depending on the zoning and construction type. Affordable units
offered through the IZ program have rental or sales price caps that are tied to AMI. In return for
providing affordable units, developers receive a 20 percent bonus density.

After housing is built in accordance with the IZ program, the developer or owner of the
affordable unit issues a notice of availability to the Department of Housing and Community
Development (DHCD), which then holds a lottery to select an eligible household for each unit.
Prospective renters and buyers have to submit information about their income and household size,
a declaration of eligibility, a mortgage pre-qualification (if applicable), and any other documents
required by the Mayor.

PURPOSE: The purpose of the exemption is to further the IZ programs goals of producing
affordable housing for residents, creating mixed-income neighborhoods, and increasing
homeownership opportunities for low- and moderate-income households.

IMPACT: Low- and moderate-income households are the intended beneficiaries of this
provision. As of December 31, 2012, 18 IZ units had been produced, but none had been sold or
rented (three of the 18 units were for sale).
492
Thus far, many housing construction projects have
been exempt from IZ because of geographic exemptions, because they received development
approvals before the effective date of IZ, or because they were subject to housing affordability
requirements as a planned unit development or through other D.C. government programs.
493
The
revenue loss estimate shown above is based on an assumption that two IZ units are sold in FY
2014, and that nine units are sold annually during the FY 2015-2017 period.

492
Department of Housing and Community Development, Inclusionary Zoning Annual and 5.5 Year
Report, April 24, 2013, p. 2.

493
Department of Housing and Community Development, pp. 5-6.
________________________________________________________________________________________________

Page 293
Exemptions

200. Lower-income homeownership households

District of Columbia Code: D.C. Official Code 42-1102(12), 47-3503(a)(1), and 47-
3503(a)(3) for deed recordation tax
D.C. Official Code 47-902(9) and 47-3503(b)(1) for transfer
tax
Sunset Date: None
Year Enacted: 1983
Total
Revenue Loss $107 $107 $107 $108

DESCRIPTION: Property that is transferred to a qualifying lower-income homeownership
household is exempt from the deed recordation and transfer taxes. A qualifying lower-income
homeownership household must meet two requirements: (1) household income can be no greater
than 120 percent of the lower-income guidelines established for the Washington metropolitan
area by the U.S. Department of Housing and Urban Development (HUD), and (2) the household
must own the property in fee simple or receive at least a 5 percent qualified ownership interest as
part of a shared equity financing agreement. The lower-income household must occupy the unit
that qualifies for the deed recordation and transfer tax exemption. The fair market value of the
property being transferred cannot exceed 80 percent of the median sale price for homes in the
District of Columbia.


The lower-income purchaser or the persons acquiring qualified ownership interests under a shared
equity financing agreement must receive a credit against the purchase price of the property equal
to the total transfer tax that would have been due without the exemption. This provision is
necessary because the transfer tax is usually paid by the seller.

494
The statute further states that, Expansion of
homeownership opportunities for lower income families is beneficial to the public peace, health,
safety and general welfare.
495

IMPACT: Families with an annual income no greater than 120 percent of the low-income
guidelines set by HUD for the Washington metropolitan area benefit from this tax expenditure,
provided that they meet the other eligibility criteria described above.

494

495
________________________________________________________________________________________________

Page 294
Exemptions

201. Nonprofit housing associations

District of Columbia Code: D.C. Official Code 42-1102(13) and 47-3505(c) for deed
recordation tax
D.C. Official Code 47-902(10) and 47-3505(b) for transfer
tax
Sunset Date: None
Year Enacted: 1983
Total
Revenue Loss $160 $160 $160 $161

DESCRIPTION: Property that is transferred to a qualifying nonprofit housing organization
496

is exempt from the deed recordation and transfer taxes if the organization certifies its intent to do
the following within the next 36 months: (1) transfer the property to a household with annual
income no greater than 120 percent of the lower-income guidelines established by the U.S.
Department of Housing and Urban Development for the Washington metropolitan area, (2)
transfer at least 35 percent of the units in a multi-family property to households meeting the
lower-income standard described above, or (3) transfer the property to a cooperative housing
association that will make at least 50 percent of the units available to households meeting the
lower-income standard.


An additional requirement for the transfer tax exemption is that the non-profit housing association
must receive a credit against the purchase price of the property in an amount equal to the transfer
tax that would have been due without the exemption. This provision is necessary because the
transfer tax is usually paid by the seller.

homeownership opportunities for lower income families to the maximum extent possible at the
lowest possible direct cost to the District of Columbia.
497
The statute further states that,
Additional support for nonprofit housing organizations through property tax abatements and
other incentives can serve to expand homeownership for lower income families at little or no
additional cost to the District of Columbia.
498

IMPACT: Nonprofit housing associations and the lower-income households they serve benefit
from this provision.

496
A qualifying nonprofit housing association has been approved by the U.S. Internal Revenue Service as
exempt from federal income taxation under section 501(c)(3) or 501(c)(4) of the Internal Revenue Code.

497

498
________________________________________________________________________________________________

Page 295
Deed Recordation Tax
Exemptions

202. Nonprofit affordable housing developers

Sunset Date: None
Year Enacted: 2012
Total
Revenue Loss $155 $155 $156 $156

DESCRIPTION: Non-profit affordable housing developers are granted an exemption from the
deed recordation tax if the property is under the restrictions of the federal low-income housing tax
credit (LIHTC) program. The reason this exemption is necessary is because property developed
through the LIHTC program is usually transferred to a private, for-profit subsidiary of the
developer. Without this exemption, the non-profit organization would have to pay the deed
recordation tax on property it is developing as affordable housing.

The LIHTC program was established by Congress in 1986 to provide the private market with an
incentive to invest in affordable rental housing. Federal housing tax credits are awarded by state
housing finance agencies to developers of qualified projects, who usually sell the credits to
investors to raise capital or equity for their projects.
499
The credit purchaser must be part of the
property ownership entity; this transfer is usually accomplished by creating a limited partnership
or limited liability company.

This approach reduces the debt that the developer would otherwise incur and thereby makes it
possible for an affordable housing project to offer lower rents. If the project maintains
compliance with LIHTC program requirements, investors receive a dollar-for-dollar credit against
their federal tax liability for a 10-year period. Projects eligible for housing tax credits must meet
low-income occupancy requirements.
500

PURPOSE: The purpose of the exemption is to ensure that non-profit developers of affordable
housing do not become subject to the deed recordation tax because of their participation in the
LIHTC program.

IMPACT: The exemption supports the operations of a program that the D.C. Housing Finance
Agency (which awards LIHTC credits in the District of Columbia) describes as one of the two
primary long-term financing programs used to develop affordable multi-family rental housing
projects.
501

499
The developer typically sells the credit in order to raise up-front cash for the affordable housing project.

500
Developers are required to set aside at least 20 percent of their units for households with incomes at or
below 50 percent of the area median, or at least 40 percent of their units for households at or below 60
percent of the area median (adjusted for family size).

501
See www.dchfa.org.
________________________________________________________________________________________________

Page 296
Exemptions

203. Resident management corporations

District of Columbia Code: D.C. Official Code 42-1102(20) and 47-3506.01(b)(1) for
recordation tax
D.C. Official Code 47-902(15) and 47-3506.01(b)(2) for
transfer tax
Sunset Date: None
Year Enacted: 1992
Personal Total

DESCRIPTION: Public housing that is transferred to a qualifying resident management
corporation is exempt from the deed recordation and transfer taxes. A resident management
corporation is a non-profit corporation in which public housing residents are the sole voting
members.

PURPOSE: The purpose of the exemption is to expand the opportunities of low-income families
who live in a public housing project to become owners of the housing. Resident ownership is
also expected to help stabilize neighborhoods by giving residents a greater stake in the safety and
upkeep of the community.

IMPACT: Resident management corporations and the individuals they serve are the intended
beneficiaries of this provision. According to the D.C. Housing Authority, the Kenilworth-
Parkside project is the only property that has been transferred to a resident management
corporation (this transfer took place in 1992). Presently, no exemptions are projected for the FY
2014 through FY 2017 period.
________________________________________________________________________________________________

Page 297
Exemptions

204. Charitable organizations

D.C. Official Code 47-902 (3) for the transfer tax
Sunset Date: None
Total
Revenue Loss $2,004 $2,009 $2,014 $2,019

tax and transfer taxes. Charitable entities are among the groups covered by 47-1002 that
qualify for this blanket exemption.

PURPOSE: The purpose of the exemption is to extend the real property tax exemption for
charitable entities to the other two taxes on real property: the deed recordation tax and the transfer
tax. As a result, there is uniform treatment under the real property, deed recordation, and transfer
taxes for charitable organizations.

IMPACT: Charitable entities benefit from this exemption, which might also have spillover
benefits for the people who receive goods or services from the charitable organizations.

________________________________________________________________________________________________

Page 298
Exemptions

205. Churches, synagogues, and mosques

Sunset Date: None
l
Revenue Loss $129 $129 $130 $130

tax and transfer taxes. Churches, synagogues, and mosques are among the groups covered under
47-1002 that qualify for this blanket exemption.

PURPOSE: The purpose of the exemption is to extend the real property tax exemption for places
of worship to the two other taxes related to real property: the deed recordation tax and the transfer
tax. As a result, there is uniform treatment under the real property, deed recordation, and transfer
taxes for churches, synagogues, mosques, and other places of worship.

IMPACT: Churches, synagogues, mosques, and other places of worship benefit from this
exemption.

________________________________________________________________________________________________

Page 299
Exemptions

206. Tax-exempt entities subject to a long-term lease

Sunset Date: None
Year Enacted: 2003
Total
Revenue Loss no estimate no estimate no estimate no estimate

DESCRIPTION: A property is exempt from the deed recordation and transfer taxes it is subject
to a lease or ground rent for a term of at least 30 years, and if the lessor would have been exempt
from real property taxation under D.C. Official Code 47-1002 if it had owned the property
outright.

PURPOSE: This exemption was created to provide equitable treatment under the deed
recordation and transfer taxes for properties that are under the control of organizations that are
exempt from the real property tax. This provision extends the exemption these entities receive
when they acquire a property in fee simple to the conveyance of property that is subject to a lease
or ground rent of at least 30 years.

IMPACT: Organizations that are exempt from the real property tax and assume control of a
property through a lease of 30 years or more benefit from this provision. It was impossible to
estimate the revenue loss from this exemption because deed recordation and transfer tax
exemptions are not categorized in a way that identifies tax-exempt entities subject to a long-term
lease.

________________________________________________________________________________________________

Page 300

SALES TAX
________________________________________________________________________________________________

Page 301
Sales Tax
Exemptions

207. Energy products used in manufacturing

District of Columbia Code: D.C. Official Code 47-2005(11) and (11A)
Sunset Date: None
Year Enacted: 1949
l Total
Revenue Loss $4,388 $4,563 $4,728 $4,889

DESCRIPTION: Gross receipts from the sale of natural or artificial gas, oil, electricity, solid
fuel, or steam are exempt from the sales tax when these energy products are used for (1)
manufacturing, assembling, processing, or refining, or (2) preparing or refrigerating goods when
used in a restaurant, including a hotel restaurant.

The exemption for energy used to produce goods in a restaurant took effect on January 1, 2010.
The rest of the exemption for energy used in manufacturing dates back to 1949, when the
Districts sales tax was first established.

Similar exemptions are common in many states, but they are sometimes provided under broader
sales tax exemptions. For example, Virginia exempts manufacturing and agricultural businesses
from paying sales taxes on their purchases of materials, machinery, and equipment, based on the
principle that these inputs are included in the value of goods that are taxed at the retail level.

PURPOSE: The purpose of the exemption is to recognize that energy products used in
manufacturing are ordinary and necessary expenses in the production process rather than outputs
offered for retail sale. The sales tax is intended to be a consumption tax rather than a tax on
intermediate goods and services that are consumed or directly used in production.

IMPACT: Manufacturing businesses and restaurants benefit from the exemption. Nevertheless,
the exemption creates questions of horizontal equity because many service industries use energy
products as inputs but do not receive a sales tax exemption for the costs of natural or artificial
gas, oil, electricity, solid fuel, or steam that they use.

________________________________________________________________________________________________

Page 302
Sales Tax
Exemptions

208. Internet access service

District of Columbia Code: D.C. Official Code 47-2001(n)(2)(F)
Sunset Date: None
Year Enacted: 1999
Total
Revenue Loss $5,691 $5,885 $6,103 $6,341

DESCRIPTION: Gross receipts from sales of Internet access service are exempt from the sales
tax. Internet access service is defined as a service that enables users to access content,
information, electronic mail, or other services offered over the Internet and may also include
access to proprietary content, information, and other services as part of a package of Internet
access services offered to customers.
502

Internet access service does not include (1) the sales of data processing and information services
that do not involve content, information, electronic mail, or other services offered over the
Internet, or (2) telecommunication services. The exemption also does not cover online purchases.

State and local taxation of Internet access has been barred by the 1998 Internet Tax Freedom Act
approved by Congress. The federal Act has since been extended twice and is in effect until
November 1, 2014. Even if the federal Act lapses, the local exemption will remain in place
unless the Mayor and Council decide otherwise.

PURPOSE: Proponents of the tax exemption for Internet access contend that the exemption will
stimulate the continued growth of a technology that has very positive economic and social
impacts.

IMPACT: Individuals or firms selling Internet access service benefit from this exemption, as do
their customers. Nevertheless, sales tax exemptions of this nature may create economic
inefficiencies (by favoring the consumption of some items rather than others based on the tax,
rather than the value of the product) and raise issues of horizontal equity. For example, some
experts argue that it is inequitable to tax the computer hardware that provides Internet access but
not the Internet access itself.

502
See D.C. Official Code 47-2001(n)(2)(F).
________________________________________________________________________________________________

Page 303
Sales Tax
Exemptions

209. Materials used in development of a qualified supermarket

Sunset Date: None
Year Enacted: 2000
Cl Total
Revenue Loss $817 $845 $876 $908

DESCRIPTION: Gross receipts from the sales of building materials related to the development
of a qualified supermarket
503
are exempt from the sales tax. A qualified supermarket is located
in a census tract where more than half of the households have incomes below 60 percent of the
area median, as determined by the U.S. Department of Housing and Urban Development.

PURPOSE: The purpose of the exemption is to encourage the construction and operation of
supermarkets in underserved areas of the city.

IMPACT: Individuals and organizations that are constructing and operating supermarkets in the
target areas benefit from this provision. Consumers are also intended beneficiaries of this
exemption because it is designed to provide an incentive for supermarkets to locate in areas that
lack them. The exemption violates the principle of horizontal equity because other businesses
locating in the target areas do not receive an exemption on the purchase of building materials.

The estimate of forgone revenue shown above is based on an assumption that three qualified
supermarkets will be constructed each year.

503
________________________________________________________________________________________________

Page 304
Sales Tax
Exemptions

210. Professional and personal services

District of Columbia Code: D.C. Official Code 47-2001(n)(2)(B)
Sunset Date: None
Year Enacted: 1949
Total
Revenue Loss $261,782 $272,253 $282,054 $291,644

DESCRIPTION: Gross receipts from sales of professional, insurance, or personal services are
exempt from the sales tax. Examples of the sales that are exempt include accounting and
bookkeeping, architectural, consulting, dental, engineering, legal, and physician services.

Maryland and Virginia provide similar exemptions to professional, insurance, and personal
services. Only four states (Hawaii, New Mexico, South Dakota, and Washington State) tax a
broad set of professional services including accounting and bookkeeping, architectural, dentist,
engineering, legal, and medical services.
504

PURPOSE: This exemption is part of most state tax systems because the sales tax originated as a
levy on purchases of tangible personal property by both individuals and businesses, rather than a
tax on all consumption. Even as the service economy has grown, policymakers have usually
continued to exempt professional, insurance, or personal services from the sales tax.

IMPACT: Firms providing professional, insurance, or personal services benefit from this
exemption, as do the consumer of these services. Nevertheless, many experts have pointed out
that the substantial growth of services as a percentage of the economy means that a large share of
consumption expenditures is not taxed, and that tax rates on tangible goods may therefore be
higher than they otherwise would be.
505
Moreover, the exemption violates the principle of
horizontal equity because two taxpayers with equal levels of consumption will pay different
amounts of sales tax if one consumes more professional services than the other.

504
William Fox, Sales Taxes in the District of Columbia, paper prepared for the D.C. Tax Revision
Commission, May 2013, p. 8.

505
See for example Virginia Joint Legislative Audit and Review Commission, Review of the Effectiveness
of Virginia Tax Preferences, report to the Governor and General Assembly of Virginia (January 2012), pp.
20-22.
________________________________________________________________________________________________

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Sales Tax
Exemptions

211. Qualified high-technology companies: certain sales

District of Columbia Code: D.C. Official Code 47-2001(n)(2)(G)
Sunset Date: None
Year Enacted: 2001
l Total
Revenue Loss $672 $695 $721 $749

DESCRIPTION: The gross receipts from certain sales of intangible property or services, which
are otherwise taxable, are exempt from the sales tax if the sale is made by a qualified high
technology company within the District of Columbia. The list of tax-exempt products and
services includes website design, maintenance, hosting, or operation; Internet-related consulting,
advertising, or promotion services; graphic design; banner advertising; subscription services; and
Internet website design and maintenance services. This exemption does not apply to
telecommunication service providers.

and hardware; and advanced materials and processing technologies.

This sales tax exemption is part of a package of incentives for high-technology firms authorized
506
Maryland and
Virginia do not provide a similar sales tax exemption for high-technology companies.

PURPOSE: The purpose of the exemption is to encourage the growth of high-technology
employment base.

The exemption violates the principle of horizontal equity because companies in other industries
do not receive similar treatment (nor do companies that sell similar products but do not meet the
definition of a qualified high-technology company).

506
The other incentives, which include a reduced corporate tax rate, increased expensing of capital assets,
employment credits, property tax abatements, and personal property tax exemptions, are discussed

________________________________________________________________________________________________

Page 306
Sales Tax
Exemptions

212. Qualified high-technology companies: technology purchases

Sunset Date: None
Year Enacted: 2001
l Total
Revenue Loss $179 $187 $194 $203

DESCRIPTION: Gross receipts from the certain sales to a qualified high-technology company
are exempt from the sales tax. The relevant items that are subject to the exemption include
computer software or hardware, and visualization and human interface technology equipment,
including operating and applications software, computers, terminals, display devices, printers,
cable, fiber, storage media, networking hardware, peripherals, and modems when purchased for
use in connection with the operation of the Qualified High Technology Company.
507


This sales tax exemption is part of a package of incentives for high-technology firms authorized
508
Maryland and
Virginia do not provide similar exemptions, but Virginia offers a sales tax exemption for
purchases of computer servers and other types of equipment used by large data centers (those
with a new capital investment of $150 million or more). Data centers must also meet job creation
and wage targets in order to qualify for Virginias sales tax exemption.

PURPOSE: The purpose of the exemption is to encourage the growth of high-technology
employment base.

The exemption violates the principle of horizontal equity because companies in other industries
do not receive similar treatment for their purchases.

507

508
The other incentives, which include a reduced corporate tax rate, increased expensing of capital gains,
employment credits, property tax abatements, and personal property tax exemptions, are discussed

________________________________________________________________________________________________

Page 307
Sales Tax
Exemptions

213. Transportation and communication services

District of Columbia Code: D.C. Official Code 47-2001(n)(2)(A)
Sunset Date: None
Year Enacted: 1949
Total
Revenue Loss $46,974 $48,571 $50,368 $52,332

DESCRIPTION: Gross receipts from sales of transportation and communication services are
exempt from the sales tax. The exemption does not include the sales of data processing services,
information services, or local telephone service.

Maryland and Virginia provide similar exemptions for transportation and communication
services.

PURPOSE: This exemption was included in the original establishment of the D.C. sales tax in
1949, likely because the sales tax originated as a levy on purchases of tangible personal property
by both individuals and businesses, rather than taxes on all consumption. Even as the service
economy has grown, policymakers continue to exempt most services from the sales tax.

IMPACT: Firms providing transportation and communication services benefit from this
exemption. The exemption violates the principle of horizontal equity because firms in other
industries do not receive similar treatment.

________________________________________________________________________________________________

Page 308
Sales Tax
Exemptions

214. Federal and D.C. governments

Sunset Date: None
Year Enacted: 1949
Total
Revenue Loss $194,110 $200,710 $208,136 $216,253

DESCRIPTION: Gross receipts from sales to the United States government, the District of
Columbia government, or any instrumentalities of either government, are exempt from the sales
tax, except for sales to national banks and federal savings and loan associations.

Maryland and Virginia also exempt the state and its political subdivisions (such as counties,
cities, townships) from the sales tax, in addition to the federal government exemption.

PURPOSE: The exemption for sales to the U.S. government recognizes the federal governments
immunity from taxation by the states or municipalities. This immunity has been established in
numerous court decisions, beginning with McCulloch v. Maryland, 17 U.S. 316 in 1819, and has
been reinforced in other cases including Clallam County v. United States, 263 U.S. 341 in 1923;
Cleveland v. United States, 323 U.S. 329, 333 in 1945; United States v. Mississippi Tax
Commission, 412 U.S. 363 in 1973; and United States v. Mississippi Tax Commission, 421 U.S.
599 in 1975.

The sales tax exemption for the District government eliminates a cost that would ultimately be
borne by D.C. taxpayers, and can be justified on the grounds that the local government is usually
an intermediate consumer of goods and services rather than the end user.

IMPACT: The federal government and the District of Columbia government benefit from this
exemption.

________________________________________________________________________________________________

Page 309
Sales Tax
Exemptions

215. Medicines, pharmaceuticals, and medical devices

District of Columbia Code: D.C. Official Code 47-2005(14) and (15)
Sunset Date: None
Year Enacted: 1949
l Total
Revenue Loss $16,294 $16,848 $17,471 $18,153

DESCRIPTION: Gross receipts from sales of medicines, pharmaceuticals, drugs, and medical
devices are exempt from the sales tax. Both Maryland and Virginia exempt medicine,
pharmaceuticals, and medical supplies from the sales tax, which is also a standard practice
nationwide.
509
However, D.C., Maryland, and Virginia are among only 10 states that also exempt
non-prescription drugs; one state charges a preferential rate of 1 percent.
510

PURPOSE: The purpose of the exemption is to make the sales tax more equitable by exempting
necessities that absorb a relatively large share of the income of low-income households, and to
avoid adding to the expense of potentially life-saving medicines, drugs, and medical devices. In
addition, the exemption protects the elderly and people in poor health, who spend more for
medical care, drugs, and medical products.

IMPACT: The sellers and purchasers of medicines, pharmaceuticals, drugs, and medical devices
benefit from this exemption, as do consumers particularly those with high medical costs such as
the elderly and individuals with chronic conditions. Nevertheless, the exemption may not be well
targeted at helping low-income individuals and families because it is available to all taxpayers.
Data on consumer expenditures show that out-of-pocket expenditures on drugs and medical care
rise along with income.
511

Nevertheless, Virginias Joint Legislative Audit and Review Commission (JLARC) concluded
that the sales tax exemption for medicine and other health products provides significant benefits
to the elderly. In examining the impact of the exemption in Virginia, JLARC stated that,
(A)verage out-of-pocket reductions in tax liability to households with at least one member 65 or
older was $66 in 2008, which was above the statewide average ($38) for all households. Their
savings were enough to enable them to purchase a year-and-a-halfs worth of prescription drugs
for common conditions such as arthritis or diabetes, according to prices under a major retailers
discount prescription drug program.
512

509
John Due and John Mikesell, Retail Sales Tax, State and Local in The Encyclopedia of Taxation and
Tax Policy, Second Edition, Joseph Cordes, Robert Ebel, and Jane Gravelle, eds. (Washington, D.C.: The
Urban Institute Press, 2005), p. 337.

510
Federation of Tax Administrators, State Sales Tax Rates and Food & Drug Exemptions, available at
www.taxadmin.org.

511
Virginia Joint Legislative Audit and Review Commission, p. 33.

512
Virginia Joint Legislative Audit and Review Commission, pp. 33-34.
________________________________________________________________________________________________

Page 310

In a paper prepared for the D.C. Tax Revision Commission, University of Tennessee professor
William Fox contended that the case for exempting non-prescription drugs is weak relative to
many other types of consumption and the exemption could be eliminated.
513

513
Professor William Fox, Sales Taxes in the District of Columbia, paper prepared for the D.C. Tax
Revision Commission, May 2013, p. 7.
________________________________________________________________________________________________

Page 311
Sales Tax
Exemptions

216. Groceries

District of Columbia Code: D.C. Official Code 47-2001(n)(2)(E)
Sunset Date: None
Year Enacted: 1949
l Total
Revenue Loss $54,382 $56,231 $58,312 $60,586

DESCRIPTION: Gross receipts from sales of food or drinks that are defined as eligible foods
under the federal Supplemental Nutrition Assistance Program (SNAP, which was formerly known
as the Food Stamp program) are exempt from sales tax, except sales of food or drink for
immediate consumption or the sale of soft drinks.
514
Snack food is exempt from the sales tax, due
to a statutory change that the District adopted in 2001.
515

Maryland exempts groceries from the sales tax, while in Virginia groceries are subject to a sales
tax of 2.5 percent instead of the 6.0 rate imposed in Northern Virginia.
516
Virginia is one of only
14 states to impose the sales tax on food: seven of these states apply the general rate, while seven
charge a lower rate.
517
Several states that tax food also provide a rebate or tax credit to protect
low-income households.

PURPOSE: The purpose of the exemption is to make the sales tax more equitable by exempting
necessities that absorb a large share of the income of low-income households.

IMPACT: All residents benefit from the exemption of groceries from the sales tax, but the
exemption is particularly important for low-income individuals and families. Some have
observed that the benefit for low-income families is smaller than one might expect, because
federal law bars sales taxation of food purchased through the SNAP program.

Some experts further contend that sales tax exemptions and reductions for food are poorly
targeted because they do not depend on income. Virginias Joint Legislative Audit and Review
Commission reported that households earning more than $70,000 accounted for 44 percent of
Virginia households in 2008, but claimed 58 percent of the reduction in tax liability from the
partial sales tax exemption for food. At the same time, households earning less than $20,000

514
Food prepared for immediate consumption is taxed at a 10 percent rate, compared to the 5.75 percent
general sales tax rate.

515
This change was part of D.C. Law 13-305, the Tax Clarity Act of 2000, effective June 9, 2001.

516
Virginias sales tax became more complicated due to legislation enacted in 2013. The base rate for the
general sales tax is now 5.3 percent, but in the Northern Virginia and Hampton Roads areas, a 0.7 percent
add-on raises the total tax to 6 percent. The regional add-on generates revenue for transportation projects.

517
Federation of Tax Administrators, State Sales Tax Rates and Food & Drug Exemptions, available at
www.taxadmin.org.

________________________________________________________________________________________________

Page 312
comprised 14 percent of Virginia households, but received only 7 percent of the total benefit from
the lower tax rate.
518
In a report prepared for the D.C. Tax Revision Commission, University of
Tennessee professor William Fox stated that, Food could be taxed and low-income households
compensated with credits against the personal income tax or a smart card could be provided to
low-income households to use as payment of sales tax on food purchases.
519

518

519
________________________________________________________________________________________________

Page 313
Sales Tax
Exemptions

217. Materials used in war memorials

Sunset Date: None
Year Enacted: 1957
l Total

DESCRIPTION: Gross receipts from the sales of material to be incorporated permanently in
any war memorial authorized by Congress to be erected on public grounds of the United States
are exempt from the sales tax.
520

PURPOSE: The purpose of the exemption is to facilitate the construction of war memorials on
public grounds in the District of Columbia.

IMPACT: The exemption benefits the U.S. government by providing a sales tax exemption for
materials used in the construction for war memorials that are authorized by Congress and built on
federally-owned land. There is no projected revenue loss from this exemption during the FY
2014 through FY 2017 period because there are no war memorials planned for construction,
according to the National Capital Planning Commission.

At the time of this writing, legislation was pending in the 113
th
Congress (H.R. 222) that would
authorize a National World War I Memorial to be built on the National Mall, but the bill had not
been acted on in the House Committee on Natural Resources. The World War II Memorial,
dedicated in 2004, is the most recent war memorial constructed in Washington, D.C.

520
________________________________________________________________________________________________

Page 314
Sales Tax
Exemptions

218. Nonprofit (501(c)(4)) organizations

Sunset Date: None
Year Enacted: 1987
Cl Total
Revenue Loss $33,171 $34,299 $35,568 $36,955

DESCRIPTION: Gross receipts from sales to an organization that is exempt from federal
corporate income tax under section 501(c)(4) of the Internal Revenue Code are exempt from
District of Columbia sales taxation. Organizations covered by section 501(c)(4) include civic
leagues or organizations not organized for profit but operated exclusively for the promotion of
social welfare, or local associations of employees, the membership of which is limited to the
employees of a designated person or persons in a particular municipality, and the net earnings of
which are devoted exclusively to charitable, educational, or recreational purposes.
521

Maryland and Virginia exempt non-profit organizations from the sales tax, as do all but five states
with a broad-based sales tax.
522

PURPOSE: The purpose of the exemption is to support the activities of non-profit organizations
that promote social welfare.

IMPACT: Organizations that are tax-exempt under section 501(c)(4) of the Internal Revenue
Code, and the people those organizations serve, benefit from this exemption. Still, sales tax
exemptions for particular organizations narrow the tax base and may result in a higher sales tax
rate for non-exempt individuals and organizations. Another consideration is that tax benefits for
non-profits give them an advantage in direct competition with for-profit firms.
523

In a recent study, the Virginia Joint Legislative Audit and Review Commission (JLARC) found
that the rate of increase in non-profit activity (as measured by per-capita expenditures) did not
change significantly after 2004, when statutory changes broadened the number of non-profits
eligible for Virginias sales tax exemption. In fact, JLARC found that many charitable non-
profits operating in Virginia did not use the exemption. Nevertheless, JLARC concluded that the
exemption helps organizations that meet important needs such as emergency medical services,
food, and housing assistance, and that the non-profits which provide the services reduce the
states burden of directly providing or funding the services.
524

521
See 26 U.S.C. 501(c)(4)(A).

522

523

524
________________________________________________________________________________________________

Page 315
Sales Tax
Exemptions

219. Semi-public institutions

Sunset Date: None
Year Enacted: 1949
Total
Revenue Loss $49,377 $51,056 $52,945 $55,010

DESCRIPTION: Gross receipts from sales to semi-public institutions are exempt from the sales
tax if (1) the institution obtains a certificate from the Mayor stating that the institution is entitled
to the sales tax exemption, (2) the vendor keeps a record of each sale, (3) the institution is located
in the District of Columbia, and (4) the property or services purchased are for use or
consumption, or both, in maintaining and operating the institution for the purpose for which it
was established, or for honoring the institution or its members.

A semi-public institution is defined as any corporation, and any community chest, fund, or
foundation, organized exclusively for religious, scientific, charitable, or educational purposes,
including hospitals, no part of the net earnings of which inures to the benefit of any private
shareholder or individual.
525

Maryland and Virginia exempt non-profit organizations from the sales tax, as do all but five states
with a broad-based sales tax.
526

PURPOSE: The purpose of the exemption is to support the mission of private, non-profit
institutions that provide religious, educational, social, philanthropic and other services that have
important public benefits. The exemption recognizes and encourages the public benefits provided
by many non-profit entities such as hospitals and libraries.

IMPACT: Semi-public (non-profit) institutions, and the people they serve, benefit from this
exemption. Still, sales tax exemptions for particular organizations narrow the tax base and may
result in a higher sales tax rate for non-exempt individuals and organizations. Another
consideration is that tax benefits for non-profits give them an advantage in direct competition
with for-profit firms.
527

In a recent study, the Virginia Joint Legislative Audit and Review Commission (JLARC) found
that the rate of increase in non-profit activity (as measured by per-capita expenditures) did not
change significantly after 2004, when statutory changes broadened the number of non-profits
eligible for Virginias sales tax exemption. In fact, JLARC found that many charitable non-

525
See D.C. Official Code 47-2001(r).

526

527

________________________________________________________________________________________________

Page 316
profits operating in Virginia did not use the exemption. Nevertheless, JLARC concluded that the
exemption helps organizations that meet important needs such as emergency medical services,
food, and housing assistance, and that the non-profits which provide the services reduce the
states burden of directly providing or funding the services.
528

528
________________________________________________________________________________________________

Page 317
Sales Tax
Exemptions

220. Miscellaneous

Sunset Date: None
Year Enacted: 1949 and subsequent years


DESCRIPTION: D.C. law includes a number of sales-tax exemptions that are relatively small in
scope. These miscellaneous exemptions cover gross receipts from (1) sales of materials and
services to the printing clerks of the U.S. House of Representatives, and sales of materials and
services by the printing clerks, (2) casual and isolated sales by a vendor who is not regularly
engaged in the business of retail sales, (3) sales of food, beverages, and other goods made for use
in the U.S. House of Representatives cloakrooms, and sales of food, beverages, and other goods
made by anyone involved in operating the cloakrooms, (4) sales of food or beverages on a train,
airline, or other form of transportation operating in interstate commerce, (5) food or drink that is
delivered and sold without profit by a non-profit volunteer organization to persons who are
confined to their homes, (6) sales of food or drink made by a senior citizen residence to the
residents, guests, and employees of the senior residence, (7) sales of vessels that are subject to
Article 29 of the Police Regulations, (8) sales of residential cable television services and
commodities,
529
(9) sales of printing services and tangible personal property to a publisher that
prints and distributes its own newspaper in the District of Columbia free of charge, (10) sales of
two-way land mobile radios used for taxicab dispatch and communication, (11) sales of material
or equipment used in the construction, repair, or alteration of real property, provided that the
materials are temporarily stored in the District of Columbia for not longer than 90 days in order to
transport the property outside the District for use solely outside the District, and (12) sales by the
U.S. government or the District government.

Sales tax exemptions for infrequent or isolated transactions are common in other states.

PURPOSE: The miscellaneous exemptions serve a variety of purposes, including (1) avoiding an
administrative burden on those who sell goods or services infrequently or incidentally, (2)
preventing double-taxation for certain goods or services subject to other taxes when they are sold,
(3) exempting goods or carriers that are passing through the District through interstate commerce
or transportation, and (4) promoting the purchase of certain items.

IMPACT: Various groups of vendors and consumers benefit from these exemptions, as described
above. There may also be a benefit to the Office of Tax and Revenue, because the cost of
collecting sales tax on incidental or unusual transactions might exceed the amount of revenue
generated. There is no estimate of the forgone revenue for these provisions, because most of the
individual items are very small and difficult to estimate.

529
These sales are subject to a gross receipts tax.
________________________________________________________________________________________________

Page 318
Sales Tax
Exemptions

221. Public utility companies

Sunset Date: None
Year Enacted: 1949
Total
Revenue Loss $81,699 $84,477 $87,602 $91,019

DESCRIPTION: Gross receipts from sales to a utility or a public-service company are exempt
from the sales tax, provided that (1) the sales are for use or consumption in furnishing a service or
commodity, and (2) the charges from furnishing the service or commodity are subject to a gross
receipts tax or mileage tax in the District of Columbia. Both Maryland and Virginia provide
similar exemptions.

PURPOSE: The purpose of the exemption is to protect utilities and public-service companies
from double taxation. Because utilities and public-service companies are subject to a gross
receipts tax, the value of the purchases made to provide utility service are already included in the
base of the gross receipts tax.

IMPACT: Utility and public-service companies benefit from this exemption, as do their
customers who would presumably bear some of the burden of the tax through higher rates.

________________________________________________________________________________________________

Page 319
Sales Tax
Exemptions

222. State and local governments

Sunset Date: None
Year Enacted: 1949
Total
Revenue Loss minimal minimal minimal minimal

DESCRIPTION: Gross receipts from sales to a state or any of its political subdivisions (counties,
cities, townships) are exempt from the sales tax, provided that the state grants a similar exemption
to the District of Columbia. The term state refers to the states, territories, and possessions of
the United States.

PURPOSE: The purpose of the exemption is to recognize that purchases made by state and local
governments are not meant for final consumption, but rather as inputs to the provision of goods
and services by those governments.

IMPACT: State and local governments benefit from the exemption, as do the taxpayers in those
jurisdictions. The District of Columbia also benefits indirectly, because the District will not
receive an exemption from the sales tax in other jurisdictions if it does not provide a reciprocal
exemption.

________________________________________________________________________________________________

Page 320
Sales Tax
Exemptions

223. Valet parking services

District of Columbia Code: D.C. Official Code 47-2001 (n)(1)(L)(iv-I) and 47-2001
(n)(2)(H)
Sunset Date: None
Year Enacted: 2002
Total
Revenue Loss $143 $148 $153 $159

DESCRIPTION: Gross receipts from sales of valet parking services are exempt from the sales
tax.

PURPOSE: The Districts sales tax generally includes the sale of or charge for the service of
parking, storing, or keeping motor vehicles or trailers.
530
Nevertheless, the District had never
levied the tax on valet parking services, and policymakers decided to codify the sales tax
exemption for valet parking services.
531

IMPACT: Valet parking providers and their customers benefit from this exemption. The
exemption creates a horizontal inequity, because other forms of parking are not exempt from
taxation.

As of March 2014, the District Department of Transportation reported that 148 valet parking
permits were in effect. The estimated revenue loss from the exemption for fiscal years 2014
through 2017 is based on assumptions about the number of days each valet parking establishment
is open and the money collected per day.

530
See D.C. Official Code 47-2001(n)(1)(L).

531
Office of the Chief Financial Officer, Fiscal Impact Statement: Fiscal Year 2003 Budget Support Act
of 2002, June 4, 2002, p. 7.
________________________________________________________________________________________________

Page 321

INSURANCE PREMIUM TAX
________________________________________________________________________________________________

Page 322
Insurance Premium Tax
Credit

224. Certified capital investment by insurance companies

Sunset Date: None
Year Enacted: 2004
C
Revenue Loss $8,804 $2,859 $0 $0

DESCRIPTION: Insurance companies that invest in a certified capital company (CAPCO) can
receive insurance premium tax credits equal to the amount of the insurance companys total debt
and equity investment in the CAPCO. By allowing insurance companies to claim premium tax
credits, the District generates a pool of investment capital.

CAPCOs must apply for certification from the Department of Insurance, Securities, and Banking
(DISB), and must demonstrate that they meet statutory requirements for equity capitalization,
venture capital experience, and other criteria. DISB has certified three CAPCOs.

The CAPCOs are required to invest the insurance company funds in qualified small businesses
that are headquartered and conduct their principal business operations in the District, or that
certify in an affidavit that they will relocate their headquarters and principal business operations
to the District within 90 days after receiving an initial investment from a CAPCO. At least 25
percent of the employees of a qualified small business must live in the District, and at least 75
percent of their employees must work in the District. Qualified small businesses must also certify
in an affidavit that they are unable to obtain conventional financing.

Amendments to the CAPCO statute enacted in 2010
532
created four tiers of qualified businesses,
based on their primary line of business and the location of their headquarters. The size of the
credit earned by a CAPCO will depend on the tier of business; for example, each dollar invested
in a Tier One business will yield a credit of $1.25. The amendments also require CAPCOs to
invest all of their certified capital within 10 years of being awarded insurance premium tax
credits. If a CAPCO fails to make the full investment within 10 years, it is barred from using its
certified capital to pay its management fees.

In any tax year, an insurance company may not claim insurance premium tax credits that exceed
25 percent of its premium tax liability, but the unused premium tax credits can be carried forward
indefinitely until they are utilized. There is an aggregate limit of $50 million on the premium tax
credits that may be granted and a $12.5 million limit per year. Tax year 2009 was the first year
that insurance companies could claim the credit.

CAPCO programs have been adopted in eight other states, but not in Maryland or Virginia.
533

532
D.C. Law 18-181, the Certified Capital Companies Improvement Amendment Act of 2010, took effect
on May 27, 2010.

533
This information is from www.capcoprogram.com.
________________________________________________________________________________________________

Page 323
PURPOSE: The purpose of the credit is to encourage private capital investment in new or
expanding small businesses in the District of Columbia. More generally, the CAPCO program is
intended to strengthen and expand the Districts economic and tax base.

IMPACT: The impact of the CAPCO program has been the subject of some dispute. The D.C.
Auditor concluded in a 2009 report that the CAPCO program was ineffective, having created only
31 jobs over four years, and recommended termination of the program.
534
Professor Stephen
Fuller of George Mason University offered a more optimistic assessment that same year,
contending that CAPCO has achieved its initial goals in spite of a declining economic
environment and the collapse of the conventional capital markets. Fuller credited the program
with supporting early-stage businesses and helping those businesses to attract additional
capital.
535

In a report issued in 2010, the Councils Committee on Public Services and Consumer Affairs
concluded that the program suffered from misaligned incentives and offered little in the way
of risk protection for the District government from poor investment decisions by the
CAPCOs.
536
While approving amendments designed to strengthen the program, the Committee
stated that, (U)nder no circumstances should the duration of the CAPCO program be extended
through the allocation of any additional premium tax credits beyond those allocated pursuant to
the original act.
537

According to the Department of Insurance, Securities, and Banking, $38.3 million in CAPCO tax
credits had been claimed by the end of FY 2013.

534
Office of the District of Columbia Auditor, Certified Capital Companies Program, March 12, 2009,
available at www.dcauditor.org.

535
Stephen Fuller, D.C. CAPCO: Progress Report and Assessment, prepared for The D.C. Coalition for
Capital, April 3, 2009.

536
Council of the District of Columbia, Committee on Public Services and Consumer Affairs, Report on
Bill 18-402, the Certified Capital Companies Improvement Amendment Act of 2010, February 24, 2010,
pp. 3-4.

537
Council of the District of Columbia, Committee on Public Services and Consumer Affairs, Report on
Bill 18-402, the Certified Capital Companies Improvement Amendment Act of 2010, February 24, 2010,
pp. 6-7.

________________________________________________________________________________________________

Page 324

PERSONAL PROPERTY TAX
________________________________________________________________________________________________

Page 325
Personal Property Tax
Exemptions

225. Digital audio radio satellite companies

District of Columbia Code: D.C. Official Code 47-1508(a)(8)
Sunset Date: None
Year Enacted: 2000
l Total

DESCRIPTION: The personal property of a digital audio radio satellite service company with a
license granted by the Federal Communications Commission is exempt from the personal
property tax, provided that the company is subject to a gross receipts tax.

PURPOSE: The purpose of the exemption is to prevent double taxation.

IMPACT: Digital audio radio satellite companies benefit from this exemption. The Office of
Revenue Analysis (ORA) cannot estimate the revenue forgone from the exemption, because there
is only one provider of digital radio service located in the District of Columbia. ORA follows the
policy of the U.S. Internal Revenue Service which states that, No statistical tabulation may be
released with cells containing data from fewer than three returns, in order to protect the
confidentiality of individual tax records.
538

538
U.S. Internal Revenue Service, Publication 1075, Tax Information Security Guidelines for Federal,
State, and Local Agencies and Entities (January 2014), p. 116.
________________________________________________________________________________________________

Page 326
Exemptions

226. Qualified high-technology companies

Sunset Date: None
Year Enacted: 2001
Cl Total
Revenue Loss $100 $104 $108 $113

DESCRIPTION: The personal property of a qualified high technology company is exempt
from personal property taxation for the 10 years beginning in the year of purchase. The
exemption applies to personal property purchased after December 31, 2000. In addition, qualified
personal property leased to a qualified high technology company under a lease-purchase or
security-purchase agreement is also exempt from personal property tax for a period not to exceed
10 years.
539


The personal property tax exemption is part of a package of incentives for high-technology firms
authorized by D.C. Law 13-256, the New E-conomy Transformation Act of 2000.
540

PURPOSE: The purpose of this exemption is to encourage the growth of high-technology
employment base.

The exemption violates the principle of horizontal equity because businesses in other industries
do not receive the same treatment.

539
The property is not exempt from the personal property tax if it is leased to a qualified high-technology
company under an operating lease.

540
The other incentives, which include a reduced corporate tax rate, increased expensing of capital assets,
employment credits, property tax abatements, and sales tax exemptions, are discussed elsewhere in this
section.

________________________________________________________________________________________________

Page 327
Exemptions

227. Qualified supermarkets

Sunset Date: None
Year Enacted: 2000
l Total
Revenue Loss $312 $316 $319 $322

DESCRIPTION: The personal property of a qualified supermarket is exempt from personal
property taxation for 10 years, subject to several conditions. First, the real property where the
personal property is located must continue to be used as a supermarket. Second, if the
supermarket leases the real property where it is located, the owner of the property must reduce the
rent charged to the supermarket by the amount of any real property tax exemption it receives for
being the site of a qualified supermarket. Third, the supermarket must meet its requirements
under the First Source program, which requires private organizations receiving D.C.
government aid to give priority to D.C. residents in filling new jobs.
541

A qualified supermarket is a supermarket located in a census tract where more than half of the
households have incomes below 60 percent of the area median, as determined by the U.S.
Department of Housing and Urban Development.

PURPOSE: The purpose of the exemption is to encourage the construction and operation of
supermarkets in underserved areas of the city.

IMPACT: Individuals and organizations that are constructing and operating supermarkets in the
target areas benefit from this provision. By extension, residents of these areas benefit by gaining
greater access to a wider range of food in their neighborhood. The exemption violates the
principle of horizontal equity because other businesses that locate in the same areas do not
receive similar treatment, nor do supermarkets located outside of the eligible areas.

541
Specifically, the beneficiaries of D.C. government aid are expected to hire D.C. residents for at least 51
percent of their new jobs.
________________________________________________________________________________________________

Page 328
Exemptions

228. Solar energy systems

Sunset Date: None
Year Enacted: 2013
l Total
Revenue Loss $124 $125 $126 $127

DESCRIPTION: Solar energy systems are exempt from the personal property tax. Solar
energy is defined as radiant energy, direct, diffuse, or reflected, received from the sun at
wavelengths suitable for conversion into thermal, chemical, or electrical energy, that is collected
generated, or stored for use at a later time.
542

PURPOSE: The purpose of the exemption is to encourage the installation of large, commercial
solar energy systems and thereby help the District to achieve its target of using at least 2.5 percent
of energy from solar sources by 2023.
543

IMPACT: Proponents argue that solar energy systems are not financially viable without the
personal property tax exemption, especially in light of the significant capital investment that the
systems require. Nevertheless, a Tax Abatement Financial Analysis issued by the Chief
Financial Officer found that, Because District renewable energy portfolio standards, along with
Federal renewable energy incentives currently in place, are sufficient to make investment in solar
systems a profitable investment solar energy exemptions are not generally necessary in order
for solar power systems to be developed in the District.
544

542

543
See Council of the District of Columbia, Report on Bill 19-749, the Energy Innovation and Savings
Amendment Act of 2012, dated October 24, 2012, pp. 2, 5-6.

544
Office of the Chief Financial Officer, Tax Abatement Financial Analysis: Energy Innovation and
Savings Amendment Act of 2012, dated June 29, 2012, p. 1.
________________________________________________________________________________________________

Page 329
Exemptions

229. Cogeneration systems

Sunset Date: None
Year Enacted: 2013
l Total
Revenue Loss $0 $0 $0 $1,370

DESCRIPTION: Cogeneration systems, which are defined as systems that produce both electric
energy and steam or forms of useful energy (such as heat) that are used for industrial,
commercial, heating, or cooling purposes, are exempt from the personal property tax beginning
on October 1, 2016.

PURPOSE: The purpose of the exemption is to encourage the development of cogeneration
systems and thereby promote more efficient forms of energy use. Although traditional power
sources are only 33 percent efficient, meaning that they waste approximately two-thirds of the
energy they produce, cogeneration systems have an efficiency rate of 60 to 80 percent.
545

IMPACT: The exemption is expected to benefit a cogeneration project planned for a large
development on the Southwest waterfront. Proponents argue that cogeneration systems are not
financially viable without the personal property tax exemption, especially in light of the
significant capital investment that the systems require.

Nevertheless, a Tax Abatement Financial Analysis (TAFA) issued by the Chief Financial
Officer found that, (C)ogeneration exemptions are unlikely to be necessary, as cogeneration
systems generally provide a reasonable return on investment . The TAFA pointed out that the
long-term energy savings resulting from cogeneration can justify the initial up-front capital
investment.
546

545
Council of the District of Columbia, Report on Bill 19-749, the Energy Innovation and Savings
Amendment Act of 2012, dated October 4, 2012, pp. 2, 6-7.

546
Office of the Chief Financial Officer, Tax Abatement Financial Analysis: Energy Innovation and
Savings Amendment Act of 2012, dated June 29, 2012, pp. 1-2.
________________________________________________________________________________________________

Page 330
Exemptions

230. Non-profit organizations

Sunset Date: None
Year Enacted: 1902
l Total

DESCRIPTION: The personal property of any non-profit organization organized exclusively for
religious, scientific, charitable, or educational purposes, including hospitals, is exempt from
personal property taxation, provided that that the organization obtains a letter from the Chief
Financial Officer stating that it is entitled to the exemption. Any personal property used for
activities that generated unrelated business income subject to tax under section 511 of the U.S.
Internal Revenue Code of 1986 is not exempt from the personal property tax.

PURPOSE: The exemption supports a general policy of providing tax exemptions to non-profit
organizations that provide religious, scientific, charitable, educational, or cultural benefits to the
general public.

IMPACT: Non-profit organizations organized exclusively for religious, scientific, charitable,
educational, or cultural purposes benefit from this exemption. By narrowing the tax base, it is
possible that this and similar exemptions increase the tax rate on entities that must pay the tax.
________________________________________________________________________________________________

Page 331

Exemptions

231. Public utility and toll telecommunications providers

District of Columbia Code: D.C. Official Code 47-1508(a)(3A)
Sunset Date: None
Year Enacted: 2001
Cl Total

DESCRIPTION: The personal property of any company that is subject to a public utility tax or
the toll telecommunications tax is exempt from the personal property tax.

PURPOSE: The purpose of the exemption is to prevent double taxation.

IMPACT: Companies that are subject to the public utility tax or the toll telecommunications tax
benefit from this exemption.

________________________________________________________________________________________________

Page 332
Exemptions

232. Wireless telecommunication companies

Sunset Date: None
Year Enacted: 1998
Cl Total
Revenue Loss minimal minimal minimal minimal

DESCRIPTION: The personal property of a wireless telecommunication company is exempt
from personal property taxation, except for office equipment or office furniture. This exemption
includes resellers that purchase telecommunications services from another telecommunications
service provider, and then resell or integrate the purchased services into a mobile
telecommunication service. The exemption is valid whether or not the wireless company uses the
property to provide a service which is subject to the toll telecommunications tax.

PURPOSE: The purpose of the exemption is to provide wireless telecommunication companies
with a personal property tax exemption equivalent to the exemption provided to other
telecommunication companies.

IMPACT: Wireless telecommunication companies benefit from the exemption. Nevertheless,
the number of firms that claim the exemption and the associated reduction in tax are unknown
because the wireless telecommunication companies do not have to file a form with the Office of
Tax and Revenue to be eligible.

The estimated revenue loss is minimal (less than $50,000 per year) because U.S. Census
Bureau data show that wireless telecommunication companies are typically small (approximately
30 employees).
547
D.C. law exempts the first $225,000 of taxable personal property from the tax,
and most wireless telecommunication companies might therefore be exempt, due to their size,
even without this blanket exemption. The majority of D.C. businesses have no personal property
tax liability as a result of the $225,000 exemption.

The exemption violates the principle of horizontal equity because other firms with similar
amounts or stocks of personal property do not receive similar treatment.

547
Specifically, the 2007 Economic Census reported that there were 31 wireless telecommunication
companies in the District of Columbia with 925 employees, an average of 29.8 employees per firm.
________________________________________________________________________________________________

Page 333
Exemptions

233. Works of art lent to the National Gallery of Art by non-residents

Sunset Date: None
Year Enacted: 1950
l Total

DESCRIPTION: Works of art owned by an individual who is not a resident or a citizen of the
United States are exempt from the personal property tax, provided that the works of art are lent to
the National Gallery of Art solely for exhibition without charge to the general public.

PURPOSE: The U.S. Congress established the exemption in order to facilitate a National Gallery
of Art exhibition of the paintings of oil magnate Calouste Gulbenkian, who was considered to
have one of the best private art collections in the world. Mr. Gulbenkian was unwilling to lend
his paintings to the National Gallery without assurances that they would be exempt from federal
and District of Columbia taxation, particularly if he were to pass away while the paintings were
on loan.
548
Therefore, on September 1, 1950, Congress enacted P.L. 81-749, which established
that works of art owned by a non-resident of the United States who is not a citizen of the U.S.,
and lent for exhibition by the National Gallery of Art, are exempt from the federal estate tax and
from the D.C. inheritance and personal property taxes.
549

The exhibit, European Paintings from the Gulbenkian Collection, was open to the public from
October 8, 1950, to May 31, 1951. Included were works by Ghirlandaio, Rubens, Van Dyck,
Rembrandt, Fragonard, Gainsborough, Corot, Manet, Monet, Degas, and Renoir.

IMPACT: There is no evidence that the exemption has been used in any cases besides the
Gulbenkian exhibit.

548
U.S. House of Representatives, Committee on Ways and Means, 81
st
Congress, Report to Accompany
House J. Res. 497 (Report No. 2724), July 24, 1950, pp. 1-2.

549
The relevant provision of the inheritance tax was repealed when the inheritance tax law was rewritten in
1987.
________________________________________________________________________________________________

Page 334
Exemptions

234. Motor vehicles and trailers

Sunset Date: None
Year Enacted: 1954
l Total
Revenue Loss $2,437 $2,461 $2,486 $2,511

DESCRIPTION: Any motor vehicle or trailer registered in the District of Columbia is exempt
from personal property taxation, except that special equipment mounted on a motor vehicle or
trailer and not used for the transportation of persons or property is taxed as tangible personal
property. The Districts personal property tax applies only to business property, so the motor
vehicles owned by District residents for their personal use would not be taxed even if this
exemption were not in place.

PURPOSE: The reason for the exemption is not known, but many states do not include motor
vehicles in their personal property tax.
550
Motor vehicles are exempt from the personal property
tax in Maryland, but personal and commercial motor vehicles in Virginia are subject to the
personal property tax.
551

IMPACT: Owners of commercial motor vehicles and trailers benefit from this exemption. As of
March 2014, there were 18,051 commercial vehicles registered in the District of Columbia,
according to the D.C. Department of Motor Vehicles. The exemption violates the principle of
economic neutrality because firms personal property tax liability could vary depending on the
type of property owned, even if they have the same level of income or assets.

550
John Bowman, Personal Property Taxation in District of Columbia Tax Revision Commission, Taxing
Simply, Taxing Fairly: Full Report (1998), Chapter H, p. 204.

551
In Virginia, each city or county sets its own personal property tax rate and the state subsidizes some
personal property tax relief for non-commercial motor vehicles.

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